Samantha Galvin

About Samantha Galvin

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

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.

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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.

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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).

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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.

A Tax Court Procedural Anomaly: the Trial Subpoena Duces Tecum, Designated Orders July 29 – August 2

Subpoenas, morphing motions and a protestor’s use of the Tax Court judgment finality rule were covered in orders issued during the week of July 29th. Judge Leyden also made sincere efforts to help petitioners help themselves and prevent dismissal of their case (here), and the petitioners heeded her advice.

Docket No. 19502-17, Cross Refined Coal, LLC, U.S.A. Refined Coal, LLC, Tax Matters Partner v. C.I.R. (order here)

This first order was not actually designated, but Bob Kamman raised it as one that perhaps should have been, because it involves a distinctive aspect of Tax Court procedure: the trial subpoena duces tecum.

Information and documents can (and should) be requested well in advance of trial but if they are not provided, then the mechanism available to the parties to demand the production of documents is with a trial subpoena duces tecum. Section 7456(a)(1) requires subpoenaed third parties to appear and produce discovery-related documents at the “designated place of hearing,” rather than some other location at another time as allowed by other Courts (see Fed. R. Civ. P. 45). The rule is in contrast with typical Tax Court procedures that encourage the parties to exchange information informally and as early as possible.

In this order, the petitioner moves to quash the trial subpoenas that the IRS served on six non-parties. Petitioner argues that the issuance of subpoenas is the IRS’s attempt to obtain discovery from petitioner in violation of Rule 70(a)(2), which requires that discovery between parties be completed no later than 45 days prior to the calendar call date. The Court disagrees that the rule applies because the subpoenas were served on non-parties, rather than the petitioner or another party in the case.

Petitioner’s issue with the subpoenas is the IRS’s timing. The subpoenas were served on the non-parties 25 to 21 days before the calendar call, and since the subpoenas order the non-parties appear at trial it means there may be very little time for the petitioner to review any newly produced documents.

A rule governing the timing for subpoenas does not seem to exist in the Code or Tax Court rules. The Tax Court’s website suggests that the subpoena form can be obtained from the trial clerk at the trial session (it is also available on the Tax Court’s website, here). There are some references to timing in the Internal Revenue Manual which instructs IRS employees that, “[t] he time for the issuance of necessary subpoenas will vary from case to case depending to a large extent upon the finalization of stipulations,” and “[t]o be effective in enforcing the attendance of the witness, a subpoena must be served on the witness a reasonable time in advance of its return date. A ‘reasonable time’ will vary from witness to witness depending upon the location of the residence of the witness and the place of trial and, in the case of a subpoena duces tecum, the nature of the documents and records called for by the subpoena.” I.R.M. 35.4.4.4.1.1

The Court points out that its standing pretrial order requires exhibits be exchanged before trial, but an exception to the requirement can be made if the documents are received from a third-party at the trial session, when the proffering party had no prior opportunity to receive and exchange them.

That being said, the Court is somewhat suspicious of the IRS’s timing in this case and states, “[i]f respondent’s use of the subpoenas in this case were to result in a large number of previously undisclosed documents being offered at trial, we would expect to inquire about whether the last-minute production of the documents was actually imposed on respondent through no fault of his own, or whether instead the subpoenas were a blameworthy last-minute attempt to obtain documents that he could have attempted to obtain in time to comply with the standing pretrial order.”

The Court also sympathizes with petitioner’s concerns, but believes they are premature – because it is not guaranteed that the third parties will submit documents nor that the IRS will offer any submitted documents into evidence. Petitioner will still have the option to object later if the information produced by the subpoenas results in prejudice.

The flip side of the subpoena issue involves the timing of their return.  Neither the IRS nor a taxpayer who issues a subpoena duces tecum has the ability to force the third party to provide the documents prior to calendar call.  While the IRS could have summoned the documents prior to issuing the notice of deficiency, once in Tax Court the summons procedure no longer applies.  It may be fair to fault the IRS for not using its summons power to obtain necessary third party information prior to issuing the notice but if the need for the third party documents does not become apparent until after the notice has gone out, the IRS has no way to force the third party to turn over the documents before calendar call.  This is not ideal for either party since neither party may know what the documents will provide.  Usually, a party issuing a subpoena duces tecum will try to get the recipient of the document to produce the documents before calendar call in order to avoid the problem of having to come down to court.  This informal process can circumvent the problems described here.  However, if the third party does not want to turn over the documents until calendar call, the party seeking the documents does not have easy tools in the Tax Court to force their hand prior to calendar call.

Docket Nos. 17038-18L & 17353-18L, The Diversified Group Incorporated, et al. v. C.I.R. (order here)

Next up is yet another section 6751(b)(1) case, in a consolidated docket, addressing the timeliness standard established in Clay, but this order also involves the application of a Tax Court rule that allows the Court to treat the petitioners’ motion for judgment on the pleadings as a motion for summary judgment. This is permissible when matters outside the pleadings are presented to the Court, and not excluded, which then allows the motion to be governed by Rule 121.

A judgment on the pleadings is appropriate when it is clear from the pleadings themselves that the case presents no genuine issues of fact and only issues of law. The basis for the judgment is limited to the pleadings and admissions already presented, so there is no option to present additional information.

A motion for summary judgment is appropriate when there are issues raised by the pleadings, but the issues are not genuine issues of material fact and the moving party is entitled to judgment as a matter of law. A motion for summary judgment can address matters outside of the pleadings and the parties are given a reasonable opportunity to present all information pertinent to the motion pursuant to Rule 121.

In this case, petitioners moved for a judgment on the pleadings because the IRS included proof that it had met the timeliness standard under Graev III in the pleadings, but the time frame established by the pleadings is too late under Clay. In response, however, the IRS presented (and the Court did not exclude) the declaration of the immediate supervisor of the revenue agent involved in the case, and exhibits showing that supervisory approval was obtained much earlier than the date on the Form 8278 included in the pleadings. The Court finds the IRS’s information sufficient to raise a genuine issue of material fact regarding when, and in what fashion, managerial approval was obtained. As a result, the Court denies the petitioners’ motion for summary judgment.

Docket No. 335-19, Jalees Muzikir v. C.I.R. (order here)

In this designated order, the IRS’s motion for judgment on the pleadings is granted. Petitioner had previously filed a “years petition” for the year at issue. According to a footnote in the order, “a ‘years petition’ does nothing other than allege that for a substantial number of consecutive taxable years the taxpayer did not receive any jurisdictionally-relevant IRS notice, such as a notice of deficiency or a notice of determination, that would permit an appeal to the Tax Court. A ‘years petition’ is the manifestation of protest from tax deniers and tax protestors.” The case petitioner instituted with the “years petition” was dismissed for lack of jurisdiction, but then he subsequently received a notice of deficiency for one of the years which is the year at issue in this order.

Petitioner argues that since the Court dismissed his initial case, the IRS doesn’t have jurisdiction over the year at issue now because of the Tax Court judgment finality rule under section 7481. The Court disagrees with this analysis and grants the IRS’s motion, because petitioner did not raise any issues other than the IRS’s lack of jurisdiction.

Jurisdiction Cannot Be Manufactured: Designated Orders 6/3/19 – 6/7/19

The most exciting designated order during the week of June 3, 2019, by far, was in Docket No. 14307-18, Scott Allan Webber v. CIR. It was so exciting that it was worthy of its own post, which is here (and I’m thankful to William Schmidt for giving it the attention it deserves).

Docket No. 15445-18, Stephen E. Haney v. CIR (order here), Docket No. 15435-18, Ricardo C. Lacey & Cynthia V. Lacey v. CIR (order here), and Docket No. 15315-18, Steven E. Ayers & Donna J. Ayers v. CIR (order here)

Typically, when I come across three designated orders with nearly identical language it is because the same order was issued in a consolidated docket. But that was not the case during the week of June 3; rather there were three separate cases involving the same bad actor. What he did was bad, but not bad enough to rise to the level of the Court making a Department of Justice referral – which is a little surprising.

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Detailed facts about each petitioner’s specific case were not included in the orders, but each one is before the Court on a motion to dismiss for lack of jurisdiction, and the same oddity happened in all three cases. A petition was filed with the Court, which included a copy of a notice of deficiency, but the date on the petitioner’s notice of deficiency didn’t match the date on the version the IRS had. The IRS produced its version as well as a certified mailing list reflecting the date that matched the IRS’s version.

The Court conducted an evidentiary hearing to develop a record that would explain why there was a discrepancy between the dates on the notices.

The Court noted other similarities in the cases: all three petitions originated from the same tax preparation company (according to the return address labels), and appear to have been signed by the same person, but there are no markings or disclosures to indicate that a third party signed on behalf of the petitioners.

In an effort to gather information, the IRS subpoenaed the accountant associated with the tax preparation company (the “accountant”) on the return address labels. They directed him to appear and testify at the evidentiary hearing, but he did not.

Instead, a taxpayer unrelated to any of the three cases came to testify for the IRS about his experience with the accountant. In his testimony, the taxpayer explained that he invested in a company and later took substantial losses related to the investment on his federal income tax return. The IRS proposed to disallow the losses and on the advice of his tax preparer, the taxpayer met with the accountant (who was the tax preparer for the company the taxpayer invested in). The accountant assured him that the IRS was incorrect, and he would take care of the matter and the taxpayer signed a power of attorney allowing the accountant to represent him.

Then, the taxpayer received a notice of deficiency and forwarded it to the accountant, who he believed was still his representative at the time. The taxpayer reached out to the accountant several times to inquire about whether a petition had been filed with the Court and did not receive a response from the accountant but did receive a bill from the IRS.

Sometime later, the taxpayer received notice from the Court that it had received a petition on the taxpayer’s behalf. The IRS filed a motion to dismiss in the case alleging that the petition was not timely filed. The IRS alleged that the notice of deficiency had been altered to make it appear timely filed. The taxpayer hired an attorney to help him respond to the motion, and in his response claimed that he believed his former representative, the accountant, had altered the dates.

Based on the taxpayer’s testimony and IRS records, the Court finds that the accountant was responsible for altering the dates in all three designated order cases. The Court also warns the accountant against misleading the Court, harming taxpayers and wasting the Court’s and IRS’s resources in the future.

It is unclear from the orders (and from some additional research) whether the accountant actually has the authority to represent individuals before the IRS and Tax Court. In all three cases petitioners are designated as pro se, and presumably, the petitioners would have needed to ratify their petitions if they did not authorize the initial petition’s filing.

One last oddity is that motions for continuance were filed by petitioners in all three cases on the exact same day, a week after the orders were issued and the cases had been dismissed, which may suggest an attempt at continued involvement by the accountant.

Docket No. 19502-17, Cross Refined Coal, LLC, USA Refined Coal, LLC, Tax Matters Partner v. CIR (order here)

This next order addresses discovery motions; more specifically, both parties’ motion to compel the production of documents. The parties have decided to utilize a “quick peek” review and the Court approves. Procedurally Taxing covered this uncommon procedure back in 2016 in a post by Les, here. Since it has been a few years (and I assume educating the public on this option was the reason the Court designated the order), here is a quick refresher:

The procedure originates from Federal Rule of Evidence 502, which states, “A federal court may order that the privilege or protection is not waived by disclosure connected with the litigation pending before the court.”  As a result, the procedure can speed up the discovery process by allowing parties to review substantial amounts of information without the risk of waiving any privilege.

In the remaining designated orders, the Court calculates the value of a donated building façade in a case involving a disputed charitable contribution deduction after the parties couldn’t reach an agreement (order here), and the Court grants a summary judgment motion in a CDP special circumstances offer in compromise case (order here).

Clay v. Commissioner: Section 6751(b) Approval Required before 30-Day Letter

Oh boy, another section 6751(b) issue and it’s the storm Judge Holmes foresaw coming. It has arrived, in the Graev of Thrones, winter is here.

The only designated order during the week of May 6 was in Docket No: 427-17, Michael K. Simpson & Cynthia R. Simpson v. CIR (order here). The order itself was not very substantive and only one page long. The case was already tried on April 18, 2019 in Salt Lake City, but on April 24, 2019 the Court issued its opinion in Clay v. Commissioner so it orders the parties to file responses addressing the effect of Clay as it relates to section 6751(b).

So, what happened in Clay?

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Clay’s trial was held before the Court’s opinion in Graev III was issued, so in due course the Court ordered the IRS to address the effect of section 6751(b) and show any evidence of supervisory approval in the record. The IRS couldn’t produce any evidence in the record that satisfied the burden for section 6751(b)(1), but moved to reopen the record and admit two Civil Penalty Approval Forms accompanied by declarations for two of the years at issue.

Petitioners did not oppose the motion but raised issues with the documents the IRS produced in support of 6751(b) compliance. The Court permitted petitioner to conduct additional discovery and granted petitioner’s motion to reopen the record to include documents relating to the review of the penalties to support petitioner’s argument that the supervisory approval was not timely.

Section 6751(b) requires that no penalty be assessed, “unless the initial determination of such assessment is personally approved (in writing) by the immediate supervisor of the individual making such determination.” Graev III held that the initial determination is no later than the date the IRS issues the notice of deficiency (although the IRS can still assert penalties in an answer or amended answer in Tax Court). Clay takes this a step further, and asks, should the initial determination occur earlier than the notice of deficiency?

In other words, is penalty approval required before an agent sends a taxpayer a 30-day letter with a Revenue Agent Report (RAR) attached which proposes adjustments and includes penalties?

The petitioner thinks so and argues that the initial determination of a penalty is “the first time an IRS official introduced the penalty into the conversation.” Graev III, 149 T.C. at 500, 501. In Clay, the RAR was the first correspondence that introduced penalties into the conversation and so it should be considered the initial determination under section 6751(b).

The Court agrees and points out that the determinations made in a notice of deficiency typically are based on the adjustments proposed in an RAR. In situations where an agent sends a taxpayer a formal communication proposing adjustments which advises the taxpayer that penalties will be proposed and advises the taxpayer of the right to appeal them (via a 30-day letter to which the RAR is attached), then the issue of penalties is officially on the table. In other words, Clay requires the IRS to get written supervisory approval before it issues a 30-day letter with an RAR, if the RAR proposes penalties (and most, if not all, of the RARs that I have seen do).

Luckily for the petitioners in Clay, although the Civil Penalty Approval form was initialed before the NOD, it was after the 30-day letter and RAR were issued, and therefore, the Court held supervisory approval was not timely under 6751(b).

Returning to the week of May 6th’s only designated order, the Court orders the parties to identify whether any notice conferring the opportunity for administrative appeal was issued to petitioner, and if so, the parties should direct the Court’s attention to any such notice in evidence. Presumably this is so that the parties can demonstrate whether written supervisory approval was timely obtained under the new standard established by Clay.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Other Orders Designated

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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