William Schmidt

About William Schmidt

William Schmidt joined Kansas Legal Services in 2016 to manage cases for the Kansas Low Income Taxpayer Clinic and became Clinic Director January 2017. Previously, he worked on pro bono tax cases for the 3 Kansas City metro area Low Income Taxpayer Clinics. He records and edits a tax podcast called Tax Justice Warriors and is now an adjunct professor for Washburn University School of Law.

Protective Orders, New Matters and Other Issues: Designated Orders 4/13/20 to 4/17/20

There were 5 designated orders during this week from the Tax Court that covered a variety of topics.  The orders themselves were fairly short but covered some interesting points of litigation.  There is no major spotlight here, but each will get some degree of coverage.

Protective Orders

Docket Nos. 24373-18, 13826-19 (consolidated), Martin Lewis & Trina Lewis, v. C.I.R., Order available here.

The petitioners felt they needed a protective order in Tax Court because they have Tax Court cases for tax years 2014 and 2015 yet there is also a revenue agent that issued a summons to Mr. Lewis for calendar years 2012 through 2018.  The IRS objected to the motion for a protective order.

What is going on?  To begin, the deficiencies in the Tax Court cases relate to disallowed captive insurance premiums paid to Cedar Insurance, Ltd in 2014 and 2015.  Cedar Insurance is a micro-captive insurance company domiciled in Nevis.  It was formed and managed by Retained Risk Manager, LLC.  The payments were deducted by the petitioners as a flow through from a Subchapter S Corporation, Lewis, Kaufman, Reid, Stukey, Gattis, & Co., PC.  That is a CPA firm where Mr. Lewis was the managing shareholder.

Following the petitions filed in the Tax Court cases, an IRS revenue agent served a summons on Mr. Lewis requesting him to appear before her in the matter of the IRC section 6700 investigation of Retained Risk Manager, LLC, for 2012 through 2018.


Rule 103 is the Tax Court rule concerning Tax Court protective orders.  The petitioners cited that rule and to Universal Manufacturing v. Commissioner, but the controlling case, as cited by the IRS, is Ash v. Commissioner.  Rule 103 allows the Tax Court to issue orders to protect persons from annoyance, embarrassment, oppression, or undue burden or expense resulting from the use of the Court’s discovery procedures.  Ash allows where Tax Court litigation commenced and an administrative summons would concern another taxpayer or a different tax year, the court would not exercise their inherent power.  They will exercise their power when a petitioner can show there is a lack of independent and sufficient reason for the summons.

With the IRS objection, they included the declaration from the revenue agent, which explains that she is seeking information from Mr. Lewis unrelated to the Tax Court cases.  Also, she has not communicated with IRS counsel of record and he will not attend the summons interview.

The Court was satisfied the summons is independent of the litigation and will hold the respondent to that representation.  If circumstances change or the petitioners have new evidence, the Court may consider the matter anew.  The petitioners’ motion was denied without prejudice.

Takeaway:  I was first surprised as an LL.M. student to learn that there are times that departments in the IRS work toward independent purposes.  With the many departments in the IRS, there are certainly times that they work toward different results or have mixed motives.  This certainly may be one of those times, but I do not blame the Lewises for thinking something smells fishy at the IRS and taking preventative measures against any harassment.

New Matter?

Docket Nos. 13382-17, 13385-17, 13387-17 (consolidated), Adrian D. Smith & Nancy W. Smith, et al., v. C.I.R., Order available here.

The adjustments in these consolidated cases are due to a partnership-level examination of Adrian Smith + Gordon Gill Architecture, LLP, for tax years 2008 through 2010 concerning the disallowance of credits for research activity under IRC section 41.  The petitioners, partners of the LLP, filed a motion to shift the burden of proof, requesting an order shifting the burden of proof with respect to any new matters raised by the IRS regarding reasonable compensation under IRC sections 162 or 174.  The IRS filed their response.

The petitioners argue that the IRS had the sole issue raised during their examinations of whether the research conducted under the sample contracts was “funded research” under IRC section 41(d)(4)(H).  They claim the presentation of expert opinions on reasonable compensation requires different evidence compared to the contractual analysis of funded research that prompted the case.  Their argument is that the issue of reasonable compensation is beyond the scope of the notice of deficiency and constitutes a new matter.

Under precedent, the IRS determination of deficiency is presumed correct and the taxpayer bears the burden of proving it incorrect.  An exception to that rule applies when the IRS raises any new matter in a proceeding.  When the notice of deficiency fails to describe the basis on which the IRS relies to support the deficiency determination and that basis requires the presentation of evidence different than what is necessary to resolve the notice of deficiency’s determinations, the new basis is treated as a new matter where the IRS bears the burden of proof.

Additionally, the objective language in the notice of deficiency remains the controlling factor.  A new position taken by the IRS is not a ‘new matter’ if it “merely clarifies or develops [the] Commissioner’s original determination without requiring the presentation of different evidence, being inconsistent with [the] Commissioner’s original determination, or increasing the amount of the deficiency.”

In the Court’s review, the judge agrees with the IRS argument that the reasonableness of petitioners’ compensation was not a new matter.  The Court notes the objective language of the notices of deficiency at issue were broad, stating that the expenses claimed by the LLP did not qualify for the credit for increasing research activities under code section 41.  The indication to the petitioners was that they would have to provide evidence that it did qualify, leading to the need to provide evidence on how the compensation meets the reasonable research expenditures requirements of code section 174(e). 

The judge states the IRS reasonable compensation argument does not require the presentation of new evidence but merely clarifies or develops the original determination in the notices.  The issue of reasonable compensation is consistent with the original determinations in the notices of deficiency and it does not increase the amount of the deficiencies.  As a result, there is no new matter and the motion to shift the burden is denied.

Takeaway:  I can understand the side for the petitioners here if they were focused on “funded research” in examination and the IRS turns to “reasonable compensation.”  However, the judge believes that the notice of deficiency is broad enough regarding research activities that “reasonable compensation” does not constitute a new matter. 

Other Issues

Docket No. 7421-19, Little Horse Creek Property, LLC, Little Horse Creek, LLC, Tax Matters Partner v. C.I.R., Order available here.

This case is about a charitable contribution deduction claimed by an LLC for a conservation easement.  The IRS filed a motion for partial summary judgment, urging alternative grounds for denying the claimed deduction.  The IRS reasoning is based on contentions including an allegedly impermissible donor improvements clause.  Soon after, they filed a motion to stay proceedings asking that discovery and other pre-trial proceedings be stayed pending resolution of the motion for partial summary judgment.

The petitioner went ahead and filed two requests for admissions, with due dates in April and May of this year.  Both sets of requests were directed primarily to matters the petitioner believes are relevant to the proper disposition of the donor improvements issue.

The petitioner next filed a timely response to the motion to stay proceedings, contending that responses to its requests for admissions will support its defense against the motion for summary judgment and will support a potential cross-motion for summary judgment on one or more issues.

The Court desires to have all relevant material at the same time, to enable the Court to determine whether there exist any genuine disputes of material fact.  Accordingly, they deny the IRS motion to stay proceedings that would relieve the IRS from responding to the two sets of requests for admissions.  They grant the IRS motion to stay proceedings that will defer other forms of discovery until after the disposition of the IRS motion for partial summary judgment and any cross-motion from the petitioner on the donor improvements issue.

Docket No. 18748-18, Pengcheng Si v. C.I.R., Order available here.

After a trial in this case, the Court decided for the IRS and sustained the disallowance of deductions for other expenses, meals and entertainment, and legal and professional services.  Mr. Si filed a motion for reconsideration regarding the legal and professional services.

The legal and professional expenses are from a qui tam action filed in 2009 against a former employer under the False Claims Act that did not conclude until 2018.  Mr. Si paid $19,737 to an attorney in 2015 for legal work and the action underlying those fees was dismissed with prejudice in 2018, with no indication of any award or settlement proceeds paid in 2015.

The Court previously held that IRC section 62(a)(20) prevents deductions in excess of proceeds includible in gross income from an action brought under the False Claims Act.  Since there were no proceeds paid, the deduction is disallowed.  As the motion for reconsideration does not address that statute, it is denied.

Docket No. 25068-17L, Kent Trembly v. C.I.R., Order available here.

This case was on the docket for Omaha, Nebraska, for April 20 before the Tax Court cancelled their dockets due to COVID-19.  The IRS had filed a motion for summary judgment, but the petitioner has not been responsive.

Giving the petitioner the benefit of the doubt, the Court presumes that he thought the cancelled trial setting meant he did not need to respond to the motion.  The Court gave him an extension in this order to May 1 to respond. 

Since then, petitioner’s counsel withdrew so things are not looking good.  The Court gave Mr. Trembly an extension until June 12 to file a response and ordered that he register by June 5 for electronic access.


Hints of Coronavirus, Interlocutory Appeal, and Nonresponsiveness: Designated Orders 3/9/20 to 3/20/20

I am going to be writing about 2 weeks in my report on designated orders for March.  The first week is a week that I am covering for Samantha Galvin as she nears the end of her maternity leave (which I trust was not your typical maternity leave).  The second week is my normal week in the rotation to review designated orders.  The first week had 9 orders (with 2 additional consolidated orders) and the second week had 3 (with 5 additional consolidated).

I thought it would be better to group the orders thematically rather than chronologically.  The orders cover a broad range of topics that include first hints of coronavirus scheduling issues, interlocutory appeal, non-responsiveness (both on the petitioner and respondent sides), tax protestor-style arguments, Collection Due Process and more.

First Coronavirus Issues

Docket No. 23069-16, Kevin John, Sr. & Whitney S. Witasick v. C.I.R., Order available here.

In this case, two issues are involved.  First, the IRS filed a motion for leave pursuant to Rule 41(a) regarding computational errors in the original notice of deficiency.  Second, the petitioners responded with a motion to continue, stating that the IRS surprised them with this motion so close to trial and that if the Court grants the motion, they will need to hire counsel.


With regard to the IRS motion, the Court is troubled since the motion was filed more than 3 years after the notice of deficiency.  The case is facing its sixth continuance and the IRS motion came only 18 days prior to (the since cancelled) trial.

The petitioners moved for a continuance to the April 14 docket.  In their email with IRS counsel, they mention a continuance for trial until October; however, IRS counsel only agreed to a continuance to an April 14 trial.

The continuances for trial in this case were starting to be affected by the coronavirus issues (alluded to as “reasons unrelated to the pending motions in this case” for cancellation of the March 16 Philadelphia trial session).  In fact, this order was issued two days after the first Tax Court press release that cancelled trial sessions because of coronavirus issues (that press release cancelled trial sessions for March 16 through April 3).  That was the first of three press releases issued by the Tax Court, ultimately cancelling the rest of the then-currently scheduled trial sessions for the year, which were trials scheduled through July 3.

The IRS motion for leave to file first amendment to answer is granted.  The petitioners’ motion for continuance is denied.  The parties are to file a joint status report on or before May 11.  If the parties have not settled, they are to report on the preparation of the stipulation of facts and preparation for trial.

Interlocutory Appeal

Docket No. 19493-17, Belair Woods, LLC, Effingham Managers, LLC, Tax Matters Partner v. C.I.R., Order available here.

The subject matter in this case involves a charitable contribution deduction claimed by Belair Woods for a conservation easement.  The Tax Court has issued two opinions already in order to address issues in the case.  Within the second of the opinions, the Court held that the IRS met the supervisory approval requirements of Internal Revenue Code section 6751(b)(1) regarding penalties asserted under Code section 6662(c),(d) and (h).  Belair Woods filed a motion to certify for interlocutory appeal regarding the supervisory approval issue and the IRS filed a response objecting to the motion.

For those of you (like me) who do not work often with interlocutory appeals, they are appeals filed regarding a ruling by a court made before the trial has concluded.  Such an appeal asks for appellate review regarding an aspect of the case before the trial’s conclusion.

Here is the law regarding Tax Court interlocutory appeals as provided within the order (where you can find citations) – Internal Revenue Code section 7482(a)(2)(A) permits certification of an interlocutory order for immediate appellate review only if there is the conclusion that “a controlling question of law is involved with respect to which there is a substantial ground for difference of opinion and that an immediate appeal from that order may materially advance the ultimate termination of the litigation.”  Certification of an interlocutory order for immediate appeal is an exceptional measure that courts employ sparingly.  Before certifying such an order, the trial judge must confirm that the order involves a “controlling question of law” and that “substantial ground for difference of opinion” exists for the correctness of the determination underlying the order.  The judge must also decide whether an immediate appeal will “materially advance the ultimate termination of the litigation.”  To decide those factors, the Court must weigh policies favoring the “avoidance of piecemeal litigation and dilatory and harassing appeals.”  A “controlling question of law” must be a pure issue of law that “the court of appeals ‘can decide quickly and cleanly without having to study the record.’”  A “controlling question” is not simply “a question which if decided erroneously would lead to a reversal on appeal.”  Instead, it is one that is “serious to the conduct of the litigation.”  The requirement that an immediate appeal “materially advance the ultimate termination of the litigation” means the resolution of the controlling legal question “would serve to avoid a trial or otherwise substantially shorten the litigation.”

The Court does not believe the supervisory approval issue involves a “controlling question of law” or that immediate appeal of the issue would “materially advance the ultimate termination of the litigation.”  The supervisory approval is not serious to the overall conduct of the litigation and only relates to the penalties.  It is not ultimately relevant to the decision whether Belair is entitled to the deduction for the easement.

The immediate appeal would also not avoid or meaningfully shorten the litigation.  In fact, it would do the opposite.  Witnesses involved in the tax preparation would likely need to testify twice with regard to the charitable contribution deduction at trial and also the supervisory approval issue at interlocutory appeal.  Thus, the interlocutory appeal would protract, not shorten, the proceedings needed to resolve the issues.

The Court denied the Belair Woods motion to certify for interlocutory appeal.

I do not have much to add as I agree that the interlocutory appeal would extend the proceedings.  I presume Belair Woods was taking a desperation move to see if the interlocutory appeal could get the penalties removed.

Nonresponsive Respondent

  • Docket Nos. 13382-17, 13385-17, 13387-17 (consolidated), Adrian D. Smith & Nancy W. Smith, et al., v. C.I.R., Order available here.

The petitioners filed a motion to compel responses to interrogatories regarding their first set of 15 interrogatories to the IRS.  The case is about the research credit under Internal Revenue Code section 41 and the interrogatories ask the IRS to explain what aspect of the four-part test the IRS asserts they are not able to meet with regard to the research credit.

The Court reviews the responses and finds that the IRS was not sufficiently responsive in 14 of the 15 interrogatories.  They have a deadline of one week to provide full, complete and responsive answers or they may be precluded from introducing evidence that would have been responsive to petitioners’ interrogatories, or other sanctions as the Court may deem appropriate.

  • Docket Nos. 27268-13, 27309-13, 27371-13, 27373-13, 27374-13, 27375-13 (consolidated), Edward J. Tangel & Beatrice C. Tangel, et al., v. C.I.R., Order available here.

In this case, also about the research credit, the IRS did not respond to informal discovery.  The petitioners then served 22 interrogatories (with subparts) and 19 requests for production of documents connected to those interrogatory requests.  The IRS generally objected to the discovery requests, asserting they were unduly burdensome, called for legal conclusions, and exceeded the 25 interrogatory limit.

In 2018, the Court issued an order directing the parties to select a sample of research and experimentation projects for trial.  The parties agreed on 14 sample projects.  The petitioners asked the IRS to revisit the discovery responses by focusing on the 14 projects, but the IRS indicated their answers had not changed.  In 2020, the petitioners sent second sets of interrogatories and of requests for production of documents.  This time, the interrogatories were 15 questions limited to the 14 projects.

The IRS responded that no response was required to the interrogatories because petitioners exceeded the number of interrogatories, “the Commissioner is not required to prepare a statement of every fact or detail known to him,” and “petitioners bear the burden of proving their entitlement to the research credit.”  As they said no documents were identified in the interrogatories, they declined to identify or produce any documents.

In the Court’s analysis, the interrogatories did not exceed the limits of Rule 71(a).  The IRS is not required to state every fact known or a statement of legal authorities upon which they rely.  However, it is necessary for each party to know the position of the other party.  The discovery requests are designed to inquire into the IRS contentions.  The IRS response is insufficient to allow the petitioners to reasonably prepare for trial.

The order grants the petitioners’ motion in part, requiring the IRS to complete their supplemental responses to the interrogatories with respect to the 14 projects in a month’s time.  The motion is denied in part that the IRS is not required to disclose the legal authorities upon which they rely and they are not required to explain how each document relied upon relates to their contentions.

Even though these cases have different judges, both of these cases involve nonresponsive IRS counsel during the discovery phase regarding research credit cases set for trial in Chicago.  Maybe I am wrong, but that looks like a pattern to me.

Non-Responsive Petitioners

  • Docket No. 25051-17S, Sandra Adams Griffin v. C.I.R., Order of Dismissal and Decision available here.
  • Docket No. 2524-19, Justin Alexander Boyte v. C.I.R., Order of Dismissal and Decision available here.

In both of these cases, Judge Gale documents how the petitioners were contacted and did not respond to the Motion to Dismiss or appear in court for trial.  The judge granted the IRS motions to dismiss and dismissed the cases for failure to properly prosecute, deciding the respective deficiencies against the petitioners.

Collection Due Process Cases

  • Docket No. 14883-19 L, R. Dianne Varick, v. C.I.R., Order and Decision available here.

This case is based on Ms. Varick owing $71,961.21 for 2015.  She submitted a timely Form 12153 for a Collection Due Process hearing regarding proposed levy action.  She expressed interest in an installment agreement of $1,000 per month.  Ms. Varick submitted the requested Forms 433-A and 433-B.  In the telephone hearing, the settlement officer determined that an appropriate minimum payment for Ms. Varick would be $1,050 per month.

Ms. Varick protested, saying she could not pay that amount.  She said she could not even afford the $1,000 per month, but felt obligated to offer at least that amount.  She submitted a revised 433-A.  The settlement officer recomputed the amounts and found that Ms. Varick had disposable income of $1,913 and could pay an installment agreement amount of $1,100 per month.  Ms. Varick again stated she could not afford the amount.

The notice of determination followed, which led to the petition to Tax Court.  Upon the judge’s review, the amount proposed by the settlement officer had been within $100 of the amount proposed by Ms. Varick.  There was found to be no abuse of discretion, the IRS motion for summary judgment was granted, allowing them to proceed with the levy.

I admit to having mixed feelings here.  On the one hand, I think they might have been able to come to a compromise on the installment agreement.  On the other, if Ms. Varick looks to be able to afford the higher installment agreement on paper she might have protested the proposed installment agreement too much.

  • Docket No. 11424-19 L, Research Scientific Services LLC v. C.I.R., Order and Decision available here.

This is a Collection Due Process case regarding a business based on forms 940 and 941.  The aggregate employment tax liabilities, including interest and penalties, exceeds $200,000.  Mr. Moffatt, an officer of Research Scientific Services LLC and its representative, thought his negotiations on his individual tax issues also applied to his business tax issues.  That is the ultimate mix-up.

Mr. Moffatt is now on a payment plan regarding his individual tax issues.  He would like to resolve the business tax issues and the Court mentions potential for the LLC to have collection alternatives like an installment agreement or Offer in Compromise.

Mr. Moffatt, on behalf of the business, did not submit missing tax returns, a completed Form 433-B, or provide supporting documentation in relation to the Collection Due Process hearing.  As a result, the settlement officer did not have abuse of discretion.  The IRS motion for summary judgment was granted and the levy action is sustained.

While I feel sympathy for Mr. Moffatt, it sounds like he mismanaged the business, but it wound up with the correct result in court.

Tax Protestors?

Docket No. 7073-19, Ryan Foster v. C.I.R., Order available here.

Docket No. 7196-19, Jo Ann Sharp & Randall W. Sharp v. C.I.R., Order available here.

Docket No. 7077-19, Jo Ann Sharp v. C.I.R., Order available here.

What we have here are a series of similar orders from Judge Copeland.  In each, the petitioner(s) filed a motion for summary judgment.  In those motions, they list seven points that mostly focus on Internal Revenue Code section 280E.  The arguments allege violations that the IRS violated the constitutional rights of the petitioners with regard to the Fifth Amendment, Sixteenth Amendment, Eighth Amendment, and Fifth Amendment to the United States Constitution, among other arguments.

What follows that is an analysis regarding motions for summary judgment.  The motions were not supported by affidavits or declarations made on personal knowledge or by documents.  Without the supporting statements or documents, factual assertions in a summary judgment motion are not admissible evidence.  The motions were all denied without prejudice.

My take on these matters is that these were frivolous tax protestor-style arguments that the Court quickly denied.

Petitioner Motion to Dismiss for Lack of Jurisdiction

Docket No. 9095-19, William Michael Shumer & Susan Elaine Shumer v. C.I.R., Order available here.

The petitioners filed a motion to dismiss for lack of jurisdiction regarding their 2016 tax year notice of deficiency.  Their first argument, which is about the notice, does not get very far.  They do not argue whether it was timely filed or dispute whether they received it.  No, they state that the IRS employee did not have authority to sign the notice.  That argument is quickly dismantled – the notice of deficiency is not required to be specially signed by an authorized agent.

For their second argument, the petitioners argue regarding an IRS letter they received before filing the petition that the IRS determined they owe no additional tax.  The petitioners are concerned regarding their prayer for relief, where they requested the Court abate all penalties and determine they are due a refund of $75,325.27.

The Court denies the motion to dismiss.  Also, the penalty and refund issues are ripe for trial; the case was scheduled at that time for trial June 15 in Knoxville, Tennessee.

On its face, I would say this unrepresented couple sounds confused by the process.  It did not help anything if the IRS actually sent a letter like they claim.  In my practice, I have seen contradictory letters from the IRS.  It does not help anyone’s understanding of matters when the IRS mails out contradictory messages.

Tax Litigation in the Discovery Phase – Business Records and Responding to Discovery Requests: Designated Orders 2/17/20 to 2/21/20

The week I reviewed for February included three orders.  The first order is a routine look at Collection Due Process.  The next two bring a theme of discovery in Tax Court.  The second order is about authentication of foreign bank records in Tax Court.  The third looks at how the Tax Court reviews discovery requests and responses.

Routine Collection Due Process

Docket No. 25954-17 L, Gary L. Shaw v. C.I.R., Order and Decision available here.

Overall, this order deals with a common theme for Collection Due Process cases in the Tax Court.  The petitioner did not file the requested income tax returns (tax years 2012 and 2016-2018).  While he requested an Offer in Compromise and checked the box for “I Cannot Pay Balance,” he did not submit either of the requested forms (656 or 433-A).  The judge found that because the petitioner was not compliant, the rejection of his proposed collection alternatives was justified and the Appeals Office did not abuse their discretion.

If repeating this helps out someone with their Collection Due Process case, I will say again that in order to advance with the IRS procedurally it is necessary to provide them the paperwork they request.


Foreign Bank Records

Docket No. 13531-18, George S. Harrington v. C.I.R., Order available here.

At issue in this case is whether Mr. Harrington is liable for deficiencies and fraud penalties due to his alleged receipt of unreported income during 2005-2010.  The IRS filed a motion in limine in order to seek admission into evidence of business records from the United Bank of Switzerland (UBS) to prove the truth of the matters asserted.  Mr. Harrington objected on grounds of hearsay and authentication.

Now, dealing with low income Kansas taxpayers does not mean I regularly focus on Swiss bank accounts so I found it interesting to learn about interactions between the United States and Swiss governments.  In 2009, the U.S. Department of Justice came to an agreement with the Swiss government concerning “accounts of interest” held by U.S. citizens and residents.  Pursuant to the agreement, the IRS submitted to the Swiss government, under the bilateral tax treaty between the two nations, a request for information concerning specific accounts they believed that U.S. taxpayers owned.  The Swiss government directed UBS to turn over to the IRS information in UBS files concerning bank-only accounts, custody accounts in which securities or other investment assets were held, and offshore nominee accounts beneficially owned indirectly by U.S. persons.  The Swiss Federal Office of Justice was to oversee UBS’ compliance with those commitments.  The U.S. Competent Authority received from the Swiss government information concerning numerous U.S. taxpayers.

Regarding Mr. Harrington, the IRS received 844 pages of information concerning UBS accounts in September 2011.  That material included bank records, investment account statements, letters, emails between Mr. Harrington and UBS bankers, summaries of telephone calls, and documentation concerning entities through which assets were held.

Were the UBS documents business records?  They were 844 Bates-numbered pages accompanied by a “Certification of Business Records” by legal counsel for UBS.  The certification states the records were made at or near the time of occurrence of the matters set forth by people with knowledge of those matters, they were kept in the course of UBS regularly conducted business activity, and were “made by the said business activity as a regular practice.”  The legal counsel signed under penalty of perjury.  The court admitted the documents into evidence as self-authenticating foreign business records.

Mr. Harrington argues that legal counsel cannot certify the UBS records were business records because she is not as the Federal Rules of Evidence state a “custodian of records or other qualified witness.”  The Court points out that the requirement for a qualified witness is to be familiar with the record-keeping procedures of the organization.  Legal counsel for UBS meets that requirement.

Mr. Harrington argues against the records as being part of UBS regularly conducted business activity and questions the admissibility of emails, letters, third party communications, and summaries of client contacts.  The Court notes that UBS performed client services beyond those in connection with checking accounts.  The bank helped to create trusts, corporations, and other entities to hold client investments, solicited client goals for investments, and attempted to manage the investments in order to meet those goals.  The Court finds it consistent that the bank retained records of communication with clients in their business activity.

Mr. Harrington argued that email is informal and less trustworthy than other business records.  The Court noted that it would be normal for UBS to communicate by email with their clients in the United States and around the world.

Finally, Mr. Harrington argued that the 844 pages produced also referred to additional documents.  Since UBS produced to the IRS all documents they could locate in their files pursuant to the U.S.-Swiss agreement and under supervision of the Swiss Federal Office of Justice, the Court did not see why that was problematic.  Mr. Harrington could explain why that was so or produce further documents into evidence, but he did not.

The Court granted the IRS motion in limine admitting into evidence the foreign business records.

Discovery Requests and Responses

Docket Nos. 13382-17, 13385-17, 13387-17, Adrian D. Smith & Nancy W. Smith, et al., v. C.I.R., Order available here.

To begin with, this order is 38 pages, which is at greater length than the average designated order (for example, the other two this week were 4 pages each).  The nature of these consolidated cases is not discussed in the order because it focuses on discovery requests from the IRS to the petitioners and how responsive the petitioners’ responses have been.  Since the order is lengthy, I tried to summarize as best I could to provide the procedural issues without listing items that are more important to the parties of the case.

Basically, the IRS has sent to the petitioners several sets of interrogatories and requests for production of documents.  The IRS later submitted a report to the Court stating that the petitioners have not been responsive to specific interrogatories and requests for production of documents.  Based on those failures, the IRS seeks an order imposing sanctions against the petitioners.

In reviewing the specific interrogatory responses, the Court finds that the response to one is satisfactory while the responses to the other three are unsatisfactory.  In reviewing the specific responses to the requests for production of documents, the Court finds that the two responses in question are unsatisfactory.

There is lengthy discussion regarding the details and analysis of the responses to those four specific interrogatories and two specific requests for production of documents.  The petitioners relied on Tax Court Rule 71(e) regarding sufficiency of business records to answer interrogatories.  The Court finds their reliance on Rule 71(e) inadequate.  As an example regarding interrogatory one, it is unsatisfactory because requests regarding years 2008, 2009, and 2010 received business records concerning 2007 and 2008 (but did not provide information on 2009 and 2010).  Another example is that the response regarding contractors for the second interrogatory is not complete or adequate.  Basically, partially responsive is not responsive.

The Court also notes additional litigation that involved the petitioners where the courts imposed sanctions because the petitioners were not compliant concerning orders regarding discover requests (CRA Holdings US, Inc. v. United States and United States v. Quebe).

Turning to the requests for production of documents, the Court does not find either sufficiently responsive.  With regard to the second response, the Court finds it was not in good faith.  This is because the petitioners responded first with 12 pages.  Their supplemental answer references over 25,000 pages of previously produced documents.  The Court that the response was not in good faith.  As a result, the Court partially grants sanctions.

At the end of this designated order, there are 4 pages mainly made up of the 16 individual paragraphs regarding the specific court orders in this case.  The range of court orders includes deadlines and other miscellaneous orders.  The sanctions granted with regard to the 12 pages produced by the petitioners are that the petitioners may not introduce at trial extrinsic evidence as to whether the alleged research conducted under the six sample contracts was “funded research.”

Overall, this order provides a thorough examination of whether specific discovery requests in Tax Court are responsive or not.  The order would be worth reviewing by anyone wanting to learn more on the subject.

From Redactions to Reasonable Cause: Designated Orders 1/20/20 to 1/24/20

This week in review for January brought a group of orders with no common theme.  Two orders concern incorrect filings by petitioners, another deals with the Court’s jurisdiction for a petition, one is based on the statute of limitations in a TEFRA proceeding, and the final one is a bench opinion dealing with a taxpayer’s reasonable cause and good faith for a substantial understatement penalty.

Petitioners Needing Filing Help

Docket No. 19551-19S, Eric Bukhman & Marina Bukhman v. C.I.R., Order available here.

To begin with, I want to continue to give support for the Tax Court’s assistance with petitioners.  Many of the petitioners are pro se and need assistance with filing matters.  The Court is quite patient with them and helps them through matters.  One example is the Bukhmans.  They filed their petition without signatures.  Chief Judge Foley gave them until February 14 to ratify the petition by submitting their signatures to the Court.  The Clerk of the Court even provides them a tailored form to ratify their petition.  In fact, they did so on February 5.

Docket No. 11485-17S, Charles Easterwood & Ann M. Easterwood v. C.I.R., Order available here.

That does not explain what happened with the Easterwoods.  They are represented by counsel so there is no excuse about being pro se.  In fact, the Court directed the IRS to respond to its order.  Instead, petitioners’ counsel responded.  Included in the response was a copy of the Notice of Deficiency that did not have the taxpayer identification numbers redacted.  In the order, the response from petitioners’ counsel was stricken and the IRS was ordered they no longer needed to respond.  Caleb Smith wrote about the subsequent order directing petitioners’ counsel to refile the response with proper redactions.


I am going to take a moment to examine proper Tax Court filing.  Certainly, making sure the petitioners sign the petition is an obvious first step.  However, petitioners and counsel do not always think about redacting.  It is necessary to review the documents thoroughly because the IRS likes to put social security numbers on nearly every page.  Additionally, it is worth looking at the bar codes to see if the taxpayer’s number is embedded within the barcode number.  Next, do not forget about the scannable bar codes or QR codes that the IRS uses.  Is the taxpayer’s information included there?  I am not sure.  I do not want my client’s information to be publicly available so I redact all of those items.  Yes, I feel like I am using whiteout at the level of a conspiracy theorist, but at least I am actively protecting my client.

Let me take another moment here to speak to the IRS.  Since they are in charge of drafting these documents that then need to be filed with Tax Court, is it possible to change the specific forms such as the Notice of Deficiency that give taxpayers the ability to petition Tax Court?  By removing the taxpayer identification numbers, there would no longer be the need for pro se taxpayers or counsel to redact forms.  There would also no longer be the problem for the Tax Court to decide how to grant access to forms that may or may not have been correctly redacted when filed.  I am suggesting that the solution to this issue for petitioners and the Tax Court could start at the source.  Just saying.

Missing the Mark

Docket No. 8400-19, Laurence Harvey Edelson v. C.I.R., Order of Dismissal for Lack of Jurisdiction available here.

Mr. Edelson filed a petition with the Tax Court on May 23, 2019, alleging he never received a notice of deficiency for tax years 2005-2008 and 2010-2017.  He also stated he never received a notice of determination for those same years.  He did not attach any documents with his petition.

What is the history?  The IRS sent notices of deficiency for 2005 (on September 4, 2007), 2006 and 2007 (on May 25, 2011), and 2008 (on February 7, 2011).  There was a notice of determination for 2005 issued December 2008.  Mr. Edelson and the IRS agreed to an installment agreement for 2006-2008 tax years.  The IRS did not send notices of deficiency or notices of determination for 2010-2017.

The IRS filed a motion to dismiss for lack of jurisdiction because the 2005-2008 tax years were not timely and there were no notices of deficiency for the other years.  The Court granted the motion because they lacked jurisdiction for those tax years based on the reasons cited above.

Has the Statute of Limitations Run?

Docket No. 22295-16, 22296-16 (consolidated), Ramat Associates, Wil-Coser Associates, a Partner Other Than the Tax Matters Partner, et al., v. C.I.R., Order available here.

These consolidated cases are TEFRA cases that involve Ramat Associates (Ramat), a Delaware limited liability company.  By a Notice of Final Partnership Administrative Adjustment (FPAA), the IRS adjusted certain partnership items of Ramat’s for the 2006 tax year and determined an accuracy-related penalty.  By a second FPAA, the IRS did the same for the 2007 and 2008 tax years.

The petitioner moved for judgment on the pleadings in both consolidated cases and moved for partial summary judgment in docket # 22296-16 with respect to tax year 2008.  Both motions are based on the notion that the period of limitations has run for the assessment of taxes and penalties resulting from the adjustments made in the FPAAs.  The IRS objected.

Petitioner’s argument is based off IRC section 6229(a), which provides the period for assessing tax with regard to partnership and affected items shall not expire before three years after the later of the date on which the partnership return is filed or the last day for filing such return without regard to extensions.  Section 6229(d) tolls that period if, within the period, the IRS mails an FPAA to the partnership’s tax matters partner.

The IRS instead relies on IRC section 6501(a), saying section 6229 is not a stand-alone statute of limitations, but extends 6501(a) in certain circumstances.  Section 6501 controls the statute of limitations at the partner level for the assessment of any tax flowing from the adjustments in the case.  Section 6501(a) “provides, generally, that the amount of any tax imposed shall be assessed within three years after the return was filed, unless extended or another exception applies” while 6229(a) describes the minimum period for the assessment any tax attributable to partnership items.

The Court agrees with the IRS argument and states the IRS pled facts in sufficient detail to establish a genuine dispute as to a material question of fact whether the section 6501(a) period of limitations has lapsed for the assessment of any tax resulting from the adjustments in the FPAAs.  The Court denied both of the petitioner’s motions.

Penalties for the Taxpayer?

Docket No. 13072-18, Floyd X. Proctor v. C.I.R., Order of Service of Transcript available here.

In this bench opinion, Judge Gustafson examines a taxpayer’s reasonable cause and good faith to determine whether he should be liable for the penalties the IRS imposed.

The IRS issued a notice of deficiency to Mr. Proctor based on his adjustments to income and deductions reported on his Schedule C.  The IRS also assessed timely filing penalties and accuracy-related penalties.  The parties settled regarding the tax deficiencies, but still at issue before the court were the different penalties.

Mr. Proctor has a high school education and worked for the Department of Defense (“DOD”).  In 2011, he formed an LLC and bought a dump truck.  In 2014 and 2015 (the years at issue), he operated a trucking business in addition to his DOD employment.

The 2014 tax return was filed about 9 months late and the 2015 tax return about 11 months late.  Mr. Proctor takes responsibility for the late filings, saying he was not paying attention, was negligent, and he is not trying to get out of being at fault.

Mr. Proctor testified that he connected with a man named Mr. Charles who did similar work and advised him regarding tax filing for their occupation.  Mr. Proctor used Tax Act software for the two returns.  Mr. Proctor showed Mr. Charles the Forms 1099 issued and received, the cancelled checks, invoices, and receipts for trucking expenses.  Mr. Proctor did not realize he had not received all Forms 1099 for his trucking activity income (probably missing his snow-plowing income).  As a result, Mr. Proctor under-reported his income for those years.  Also, he reported expenses which he agreed by stipulation should be reduced.

Judge Gustafson is convinced that the deductions were not deliberately faked.  He is persuaded that Mr. Proctor believed he prepared his tax returns correctly, with serious and forthright efforts.  Accordingly, the judge believes Mr. Proctor did his reasonable best to prepare a correct tax return.

When the IRS examined Mr. Proctor’s returns, he provided bank statements and other financial information.  The IRS informed him that his returns were in error.  Mr. Proctor hired an accountant who prepared profit and loss statements for the trucking business.  After those statements were supplied to the IRS, the IRS prepared the statutory notice of deficiency.  Before communicating the penalty determination to Mr. Proctor, the individual who made that determination obtained written approval from his immediate supervisor.

In reviewing the case, Judge Gustafson finds that Mr. Proctor is liable for the section 6651(a)(1) timely filing penalty since Mr. Proctor admits his lateness was due to his neglect.

Next, Judge Gustafson turns to the accuracy-related penalty for Mr. Proctor.  As a reminder, the 6662(a) penalty is an accuracy-related penalty of 20 percent of the portion of the underpayment attributable to the taxpayer’s negligence or disregard of rules and regulations.

Is his understatement substantial?  Yes, it meets the requirement of exceeding $5,000 and it exceeds by more than 10% the tax liability Mr. Proctor should have reported on his return.

Regarding negligence, that means there must be a “failure to make a reasonable attempt to comply with the provisions of the internal revenue laws or to exercise ordinary and reasonable care in the preparation of a tax return.”  Negligence was not addressed based on the review of reasonable cause below.

For the IRS burden of production, they met their burden because the understatements were substantial and there was compliance with the supervisory approval requirements of section 6751(b).

Section 6664(c)(1) provides that no penalty shall be imposed under sections 6662 or 6663 regarding an underpayment if shown there was reasonable cause and the taxpayer acted in good faith regarding that underpayment.  Those are based on facts and circumstances, including “the experience, knowledge, and education of the taxpayer” (26 C.F.R. sec. 1.6664-4(b)(1)).  For experience, the judge states Mr. Proctor had no experience in keeping books or filing returns for a business.  For knowledge, he had little help in return preparation.  Mr. Proctor had modest education.

For determining reasonable cause, “the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax liability” (id).  Judge Gustafson holds that Mr. Proctor made a serious and good-faith effort to comply with his tax filing requirement and report his correct liability.

Judge Gustafson held that Mr. Proctor had reasonable cause and showed good faith so he was not liable for the accuracy-related penalty.

In my view, this was a fair decision for Mr. Proctor.  He received some relief regarding the accuracy-related penalty due to his situation, yet still owed the penalty due to his late filing.  He also had the tax due in his settlement with the IRS.  Sounds like the definition of a compromise to me.

Serving Subpoenas: Designated Orders 12/23/19 to 12/27/19

I am sure the week of Christmas was a slow time in the Tax Court.  In fact, there were not a large amount of designated orders that resulted during the week.  The Christmas present we received in the form of designated orders was the sole designated order I will be discussing in this post.  It deals with subpoenas, meaning the focus of this article will be a greater examination of using subpoenas in Tax Court.

Serving Subpoenas

Docket No. 17324-18, Antoine A. Johnson v. C.I.R., Order available here.


The designated order in this case is short, only three pages.  The case itself does not have terribly much connection to the focus on subpoenas.  It deals with the petitioner’s claim of identity theft regarding a Form 1099-C issued by Bank of America, which led to a statutory notice of deficiency regarding cancellation of debt income attributed to the petitioner.

What happened in the order?  It concerns the case’s trial scheduled for January 13, 2020, in Washington, D.C.  On December 16, 2019, the IRS filed a motion for an order permitting them to issue a subpoena duces tecum directing Bank of America to produce documents to them on a date prior to the January 13, 2020 calendar.  Mr. Johnson did not oppose the motion, but the Court denied the IRS motion.

Why is that?  First, looking at the motion, it explains the IRS motivations regarding the subpoena duces tecum.  Actually, the IRS originally served on Bank of America a subpoena duces tecum after the case was set for trial, using Form 14 from the Rules of the Tax Court as a means to obtain documents for use at trial.  Bank of America informed them that they would not release documents before the date specified of January 13.  The IRS admitted that they were unable to specify any other date than the calendar call date listed.  Bank of America personnel advised they would “happily comply” if the subpoena duces tecum specified an earlier date.

That is why the IRS filed their motion.  They would like to receive the documents with enough time to review them and follow up if the documents were not compliant or otherwise direct them to further discovery or other relevant information.  They stated in the motion how it would benefit everyone involved if the Court could just move the date up that they received the documents.  Bank of America would not need to make a personal appearance in court.  The parties could have settlement discussions that might avoid judicial involvement or trial.

In Judge Gustafson’s discussion of the case, he compares Rule 45 of the Federal Rules of Civil Procedure (not applicable to the U.S. Tax Court) with Rule 147 of the U.S. Tax Court Rules.  They both permit litigants to use a subpoena to require a third party to appear at trial (or a pre-trial deposition) to testify or use a subpoena duces tecum to produce documents at such a trial or deposition.

Where they differ is that Rule 45 of the Federal Rules allows a litigant to use a separate subpoena to require a third party to produce documents prior to trial, apart from the scheduling of any hearing or deposition.  This is in effect what the IRS attempted and the judge states it is not an unreasonable request, and granting the request might yield the anticipated benefit.

The issue is that Rule 147 of the U.S. Tax Court Rules does not contain a similar authorization.  Turning to Internal Revenue Code section 7456(a), it provides that Tax Court judges may require by subpoena the production, among other items, of all necessary documents at any designated place of hearing.  There is a note that this authorization is different from, and apparently narrower than, the authority given to the Court of Federal Claims.  As a result, a Tax Court litigant may serve on a third party a subpoena to produce documents at a trial session and, at that session, may call on the Court to enforce the subpoena.

Judge Gustafson includes some suggestions for litigants.  A litigant that served a subpoena duces tecum on a third party could ask them to voluntarily produce the documents before a trial session and, if they comply, excuse them from appearing at the trial session.  Also, a litigant that served such a subpoena duces tecum could request the Court for a phone conference with the parties and counsel for the third parties to encourage voluntary early production of documents.  However, given the wording of IRC 7456(a), the subpoena duces tecum of a sort the IRS requested is not authorized so the motion was denied.

Takeaway:  The process of obtaining documents from third parties provides another example of how the Tax Court differs from other courts. A legislative change to allow amendment of the Tax Court rules to provide the flexibility for obtaining documents similar to the flexibility that exists in other federal courts would seem appropriate. Judge Gustafson’s suggestions for how to work around the problem make sense and provide examples of the work arounds that have been used by litigants for years. Why not stop the need for work arounds of this type and create a system that allows for a logical flow of information in a fashion that would reduce the need for the parties to run up to the moment of trial without necessary information.

For further information on subpoenas, turn to Tax Court Rule 147 and Form 14 (the subpoena form available on the Tax Court website).  Some advice I found from a private practitioner is that a volunteer can serve 5 subpoenas before needing to get licensed and that the Tax Court no longer stamps the subpoenas.  With paying clients, use a process server but cost depends on difficulty of service.  For further Procedurally Taxing reading on subpoenas, turn here, here and here.

Unsuccessful Petitioners in Collection Due Process and Premium Tax Credit Cases: Designated Orders 11/25/19 to 11/29/19

The end of November brought 3 designated orders, where (spoiler warnings) the petitioners did not prevail.  In two collection due process cases, the petitioners were non-compliant and that led to their downfall.  The last involves a bench opinion concerning the premium tax credit and income limitations to qualify.


Collection Due Process Case 1

Docket No. 18362-18, Karson C. Kaebel v. C.I.R., Order and Decision available here.

Mr. Kaebel did not file a tax return for 2011 and the IRS filed a substitute for return.  Based on the substitute for return, the IRS mailed a statutory notice of deficiency.  Mr. Kaebel did not respond to the notice of deficiency so the IRS issued a Notice of Federal Tax Lien Filing and right to a Collection Due Process hearing in 2014, but he did not respond to that either.

In 2017, the IRS issued a Notice of Intent to Levy regarding Mr. Kaebel’s personal property.  Here, he filed a form 12153 in response to his right to a Collection Due Process hearing.  On the form, he stated that he disputed the proposed tax and penalties, requested a face-to-face hearing, which he intended to record, and his interest in discussing collection alternatives if convinced he owed the tax.

The settlement officer informed him that he could not dispute the underlying liability for the tax and additions since he did not do so in response to the 2014 notice.  The officer scheduled a telephone conference, informing Mr. Kaebel he was not eligible for a face-to-face hearing.  In order to be eligible for collection alternatives, Mr. Kaebel would need to submit a completed Form 433-A, file tax returns for 2012 through 2016, and provide proof of being current on estimated tax payments.  If Mr. Kaebel provided proof of the filed tax returns and estimated tax payments, the settlement officer would consider the face-to-face hearing request.

Since Mr. Kaebel did not provide the requested documentation and did not attend the telephone hearing, the Appeals Team Manager sustained the proposed levy action.

Mr. Kaebel disputed receiving the statutory notice of deficiency and whether one had been issued.  IRS Appeals has a copy of the statutory notice and reviewed the Certified Mailing List to confirm that the notice was mailed to his address of record.

Mr. Kaebel timely petitioned the Tax Court.  In his assertions, he says the IRS did not provide him with requested documents, was not granted a face-to-face hearing, was not granted the opportunity to challenge the liability, and did not receive the notice of deficiency.  He also states the statutory notice was not verified by a duly authorized delegate as required by the Internal Revenue Code, having no idea who “S1STSIGA” is.  The IRS moved for summary judgment on the grounds there was no abuse of discretion.

In the Court’s analysis, Mr. Kaebel received the notice of deficiency and did not act upon his opportunity to challenge the liability then.  Next, the face-to-face hearing is not mandatory so it was justified to deny Mr. Kaebel’s request there.  Mr. Kaebel did not provide the requested documents.  Last, case law recognizes a presumption of official regularity to conclude the signature on IRS notices comes from a duly authorized IRS officer.

The Court concludes there is no abuse of discretion and grants the IRS motion for summary judgment.

Collection Due Process Case 2

Docket No. 21687-18 L, Debra Zalk Spitulnik & Charles Alan Spitulnik v. C.I.R., Order and Decision available here.

The Spitulniks had tax liabilities for tax years 2008, 2009, and 2012.  By October 2017, the outstanding balances for those years were approximately $58,000, $108,000, and $1,800 for those tax years, respectively.  The IRS at that point filed a Notice of Federal Tax Lien.

In response to the notice of the tax lien, the Spitulniks requested a Collection Due Process hearing.  On their form, they asked for an installment agreement, lien withdrawal, and innocent spouse relief (that relief is being reviewed under a separate Tax Court case).  They attached to their request a letter describing their medical conditions, related financial hardships, and difficulties they faced in managing their financial obligations.  The IRS determined they “met one or more of the elements” of IRC section 6323(j) and withdrew the federal tax lien.

In scheduling the Collection Due Process hearing, the Appeals Officer informed the Spitulniks that they would need to be current on their 2017 and 2018 tax obligations to consider an installment agreement.  To do so, they would need to submit $31,486 in estimated payments toward their 2017 tax account (estimated because the 2017 tax return was on extension and not yet filed), plus any 2018 estimated payment required.

Before the hearing, the Spitulniks submitted correspondence about their financial situation but nothing about compliance with estimated tax payments.  On the date of the hearing, they informed the officer that they submitted a $17,000 estimated tax payment for 2017.  He notified them they could not qualify for an installment agreement for the three years of liabilities because they were not fully in compliance.

The IRS issued a Notice of Determination Concerning Collection Action(s) under Section 6320 and/or 6330 concerning the prior removal of the tax lien and their ineligibility for the installment agreement based on noncompliance with payments for 2017 and 2018.

The Spitulniks timely petitioned the Tax Court based on the notice of determination.  Within their later submissions to the court, they provided an IRS transcript for 2017 that shows an overpayment for 2018 was applied toward the 2017 liability.  The transcript still shows an unpaid balance for 2017 of $10,689.51.  The IRS filed a motion for summary judgment.  The Spitulniks filed a response and the IRS replied.

In the Court’s analysis, the issues before the Court are whether there was abuse of discretion by the IRS regarding the notice of federal tax lien and the denial of the installment agreement.  Since the IRS withdrew the federal tax lien in 2017, the Court considers the issue resolved.  The Spitulniks were not compliant regarding payments for the 2017 tax year so could not qualify for an installment agreement.  There is no abuse of discretion since it is within the judgment of Appeals to require compliance when determining collection alternatives.  There is no genuine dispute as to any material fact so the motion for summary judgment was granted.

Takeaway:  For both cases, I understand that compliance is necessary in order to qualify for relief in a Collection Due Process hearing.  However, it seems like the requirements were too burdensome for the petitioners.  Mr. Kaebel, for example, had to get 5 years of tax returns filed and I have seen taxpayers unable to pay for multiple years of tax return preparation.  The Spitulniks had $31,486 owed and paid $17,000 for 2017.  They also communicated about medical conditions and financial difficulties so it seems they had issues but took a significant step toward compliance.

I realize that I am viewing these cases through the lens of a low income taxpayer clinic director so I might be giving them more sympathy than they are due.  However, I wonder if the bar was set too high by the IRS for them to find relief from the Collection Due Process system.

Premium Tax Credit Bench Opinion

Docket No. 13346-18S, Wayne Dennis Woodrow & Colleen J. Woodrow v. C.I.R., Order available here.

Originally, the IRS issued a notice of deficiency to the Woodrows regarding their 2016 federal income taxes with a section 6662(a) penalty.  The IRS conceded a portion of the deficiency and the penalty before trial at Tax Court.  The portion of the deficiency in dispute related to the premium tax credit.  At issue were whether the Woodrows were entitled to the premium tax credit and whether the advance payments of the premium tax credit received exceeded the credit.  Judge Carluzzo provided details in his bench opinion.

Mr. Woodrow was laid off after a long career in the coal industry.  He was able to continue with health insurance for his family through a private plan at least through 2015.  After there was a dramatic increase in the plan, Mr. Woodrow investigated and ultimately chose another plan with the same insurance carrier through the marketplace in 2016.  Part of his decision process was that a portion of the cost would be covered by the advance payment of the premium tax credit.

Mr. Woodrow prepared their return using tax software and the adjusted gross income shown on the return is significantly higher than anticipated, due to the majority of that increase being from distributions from his retirement account and pension plan.

To be an applicable taxpayer that qualifies for the premium tax credit under IRC section 36B(c), taxpayers must have household income between 100 percent and 400 percent of the poverty guidelines.  Household income is based off of the modified adjusted gross income.  Contrary to the advice he received, the retirement income is included in the modified adjusted gross income for figuring the premium tax credit.  The retirement distributions pushed the Woodrows above 400 percent of the poverty guidelines.  They were no longer eligible for the premium tax credit so would need to repay the advance payment they no longer qualified for.

The main argument Mr. Woodrow makes against the repayment is that he received erroneous advice that the retirement income would not be part of the computation of household income for the premium tax credit.  Reliance on that advice led to choosing a marketplace plan they would not otherwise have chosen.  Both the IRS and the Tax Court provided their sympathies for the Woodrows, but they have no discretion to provide an alternative equitable result.

The deficiency determined in the notice, as modified by the IRS, was sustained and in order to give effect to the modification and concession of the 6662(a) penalty, the judge’s decision will be entered under Rule 155.

Takeaway:  In connecting the dots, I see a story where Mr. Woodrow was laid off from his job and took distributions from his retirement account and pension plan in order to have income to live off of.  Next, he self-prepared their tax return but did not take into account that the distributions negated the advance payment of the premium tax credit.  Looking to cut costs and provide for the family combined with ignorance of tax laws eventually led to problems with the IRS and a trip to Tax Court.

As noted above, the Court is sympathetic to taxpayers in these circumstances regarding the premium tax credit.  The main case cited is McGuire v. Commissioner, 149 T.C. 254 (2017), where the Court explains that they are “not a court of equity” and “cannot ignore the law to achieve an equitable result.”  For discussions of that case and related links regarding the premium tax credit in Procedurally Taxing, links are here, here and here.

Reasonable Litigation Costs and Motions to Exclude: Designated Orders 10/28/19 to 11/1/19

This week of coverage for the end of October and beginning of November brought two designated orders. The first was a short order regarding IRS motions to exclude expert testimony and reports. The second details how petitioners argued they should be awarded reasonable litigation costs for litigating against the IRS.


Motions to Exclude Expert Testimony
Docket No. 23444-14, Palmolive Building Investors, LLC, DK Palmolive Building Investors Participants, LLC, Tax Matters Partner v. C.I.R., Order available here.

This first order deals with two IRS motions in limine to exclude from evidence at trial the expert testimony and reports of two experts for petitioner. The Court denies both motions with prejudice.

For the first expert, the IRS argues the report fails to provide sufficient reasoning to support its conclusions and that the report should either be excluded in its entirety or that the expert’s direct testimony be limited “so he cannot use that testimony to expand on his report’s limited explanations to cure its obvious deficiencies”. The Court does not conclude that the expert ‘disregarded relevant facts or exaggerated values to incredible levels’ to reject the report. Instead, the IRS has the ability at trial to cross-examine the expert’s testimony and present contrary evidence.

For the second expert, the IRS argues that the report provides legal conclusions and analysis and should be excluded in its entirety (or redact such conclusions or analysis). Also, Part II should be characterized not as rebuttal but an opening report because it addresses new matters rather than rebutting specific items raised in the IRS’s expert reports, making it untimely for submitting such a report. As a cure, the Court gives the IRS opportunity to submit surrebuttal to address arguably new matters raised no later than December 2.

Takeaway: This case involves advanced litigation, but illustrates tactics involved regarding expert testimony and reports at trial. Certainly, there are guidelines for what may be included in expert reports and the adverse party at trial will do what they can to keep the reports within those guidelines.

For further details from Procedurally Taxing, there are blog posts on the same case here and here regarding the downsides of having a bad appraisal report.

If you would like to do further research on appraisal reports, here are several sources:
Estate of Elkins v. Comm’r, 140 T.C. 86 (2013), aff’d & rev’d in part, 767 F.3d 443 (5th Cir. 2014) (discounting the valuation of artworks due to the fractional interests held in them by decedent’s children)

Crimi v. Comm’r, T.C. Memo 2013-51 (excusing petitioner’s failure to comply with the qualified appraisal regulations for charitable contributions due to reasonable reliance on his CPA)

Estate of Mitchell v. Comm’r, 2011 Tax Ct. Memo LEXIS 93 at *34-41 (analyzing the comparable artworks used by expert witnesses and agreeing with the estate’s valuation of two paintings instead of the IRS’s “unreasonably high” valuations)

Estate of Noble v. Comm’r, 89 T.C.M. 649 (2005) (finding that a sale of stock of a closely-held corporation occurring subsequent to an appraisal was the appropriate method of valuation)

Bond v. Comm’r, 100 T.C. 32 (1993) (holding that taxpayers “substantially complied” with the appraisal regulations and thus were entitled to a charitable contribution deduction)

Neely v. Comm’r, 85 T.C. 934 (1985) (finding that an ordinarily prudent taxpayer should have known that an appraisal of contributed art was a substantial overvaluation).

• Glenn Dixon, The Secretive Panel of Art Experts That Tells the IRS How Much Art Is Worth, Washington Post (Dec. 7, 2017)

• Anne-Marie Rhodes, Valuing Art in an Estate: A New Perspective, 31 Cardozo Arts & Ent. L.J. 45 (2012).

Keith is on a panel presentation in February on appraisals so we are reaping the benefits of his research.

Motion for Award of Reasonable Litigation Costs
Docket No. 14429-18, Paul Edwin Johnson & Susan H. Johnson v. C.I.R., Order and Order and Decision available here.

On their 2015 tax return, the Johnsons did not report information from a Form 1099-R from Equity Trust Company (ETC) that stated Mr. Johnson received a gross distribution of $20,000 and taxable income of $20,000. In addition, ETC reported on Form 5498, IRA Contribution Information, that Mr. Johnson made a rollover contribution of $141,233 to an IRA during tax year 2015. The forms described did not identify the dates the distributions were made or the date Mr. Johnson made the rollover contribution. Although the Johnsons attached other Forms 1099-R to their tax return, the ETC forms were not attached to their 2015 tax return.

The IRS sent a Notice CP2501 requesting additional information related to the discrepancies. The Johnsons sent their own letter requesting documents, but did not provide any documents of their own related to the ETC transactions.

The IRS later issued a Notice CP2000, proposing changes to the 2015 tax liability including an additional tax of $40,429, an accuracy-related penalty of $8,086, and interest of $2,818. The IRS proposed to increase the Johnsons’ taxable income to include a $20,000 taxable distribution from ETC and a $141,793 IRA distribution from Riversource (one of the Forms 1099-R attached to their 2015 tax return).

The Johnsons responded with a letter alleging that Mr. Johnson received a retirement distribution of $141,000 in 2015 and deposited that amount into another retirement account. They did not provide any documentation for the rollover contribution or ETC distribution.

The IRS issued a notice of deficiency determining the same adjustments originally proposed in the Notice CP2000. The Johnsons again responded with a letter claiming the IRA distribution was not taxable because of the rollover without providing documentation.

The Johnsons filed a timely petition with the Tax Court for redetermination and represented themselves.

IRS counsel referred the case to the IRS Office of Appeals, who recommended that the IRS settle the case with no adjustments to the Johnsons’ tax liability. The parties filed with the Court an agreed decision (which the Court treated as a joint stipulation of settled issues) that resolved all issues in the Johnsons’ favor.

Two weeks later, Mr. Johnson filed a motion for reasonable litigation costs seeking an award of $13,486 that includes $71 for out of pocket expenses (postage and the $60 Tax Court filing fee), $3 for mileage expenses, $3,709 for preparation and filing expenses, and $9,703 for disputing the purported accuracy-related penalty. The IRS opposed that motion by the Johnsons.

In a footnote, the Court explains that the majority of the expenses do not constitute “reasonable litigation costs” as defined by Congress in IRC 7430(c)(1)(A) and (B). As a result, the Court limited its consideration to the claim for an award of $71 (the postage expenses and filing fee).

In order to be awarded a judgment for reasonable litigation costs in connection with a court proceeding under IRC section 7430, a taxpayer must (1) be the prevailing party, (2) have exhausted administrative remedies with the IRS, and (3) not have unreasonably protracted the proceedings.

The IRS conceded that the Johnsons did not unreasonably protract the proceedings. The parties have at issue whether the Johnsons exhausted their administrative remedies, but it does not reach that point.

In order to be a prevailing party, the taxpayer must (1) substantially prevail with respect to either the amount in controversy or the most significant issue or set of issues presented and (2) satisfy applicable net worth requirements. The taxpayer will ultimately fail to qualify as the prevailing party if the IRS position is shown to have been substantially justified.

The IRS concedes the two elements for the Johnsons to be the prevailing party, but contend their position in this case was substantially justified.

To establish their position as substantially justified, the IRS must show their position was “justified to a degree that could satisfy a reasonable person” or that the position has a “reasonable basis both in law and fact.” The relevant question is “whether [the IRS] knew or should have known that the position was invalid at the offset.” Generally, the position of the United States in a judicial proceeding is established in the answer to the petition.

The Court’s analysis starts with the IRS receiving the third-party information regarding Mr. Johnson’s retirement transactions and being justified in seeking clarification. The Johnsons should have records of those transactions to provide to the IRS. Their failure to provide that documentation led to the issuance of the notice of deficiency. Because the Johnsons did not provide evidence regarding a timely and proper rollover contribution in 2015, the Court finds that the IRS position in the case was substantially justified and denies Mr. Johnson’s motion for reasonable litigation costs.

Takeaway: Even though their request was reduced from $13,486, they did not even get an award of $71 from the Tax Court! This case certainly illustrates the difficulties for a petitioner to take an unstructured approach to receive reasonable litigation costs in a Tax Court case and failing in the attempt to overcome the high burden of proof regarding IRS knowledge.

The Knudson case discussed in this Procedurally Taxing post provides the path to success on fees. To overcome the substantial justification hurdle, a taxpayer must almost always make a qualified offer. The Knudson case holds that a concession by the IRS does not keep the taxpayer from obtaining fees in the situation of a qualified offer. Further PT posts on qualified offers are here and here. Christine also provided me an example of a rare case here where the court found that the IRS position was not substantially justified.

Tax Court Tips From Judge Vasquez

For the week of October 21 to 25, Judge Juan Vasquez held sessions in the two jurisdictions my clinic covers in order to provide free consultations to unrepresented petitioners. Judge Vasquez had a swing session, covering Kansas City, Missouri, for Monday through Wednesday and Wichita, Kansas, for Thursday and Friday.

On October 22, Judge Vasquez was part of a CLE put on by the Federal Bar Association titled “How to Try Your Best Case Before the Tax Court.” He wound up being the sole judge presenting so with the moderator it became more of an informal question and answer session. Those in attendance included private practitioners, IRS counsel and LITC clinicians.


Even though the session was less formal, Judge Vasquez did want to incorporate a presentation along the lines of the CLE’s title. Along those lines, he provided 7 tips for improving your case in the Tax Court arena. While I do not presume to speak for him, I will try to provide a summary of his presentation but will take blame for any misstatements.

The pretrial memorandum is the first item mentioned on the list. It is so important because it is your side’s ability to tell the case to the judge regarding the years at issue. You can educate the judge on the facts and the law from your point of view before the trial begins. Since this is a way to state your side’s argument without the other side objecting, it is a wasted opportunity when a party skips the pretrial memo.

Next, submit a timely stipulation of facts. The stipulation of facts is the collection of facts that are not in dispute by the parties, with evidentiary documents supporting those statements. The stipulations often contain statements such as when the petitioner filed tax returns for the years in question, when the IRS mailed a notice to the petitioner, and when the petitioner submitted a petition to the Tax Court that the parties are not arguing about.

I had asked the judge to expand on his comment about the connection between the stipulation of facts and Tax Court jurisdiction.  He pointed out that a notice such as the notice of deficiency or notice of determination is what allows the Court to have jurisdiction to hear the case as that is the supporting document for the petitioner to base the petition of the underlying case upon.  If the petitioner does not agree to a stipulation of facts, that could cause some concern about the Tax Court’s jurisdiction.  It is likely not a large issue since the parties will likely introduce the notice in some other fashion.  Some easier examples are if the petitioner might have attached the notice to the petition or that the IRS generally attaches the complete notice to the answer.

He did bring up a Tax Court Rule 91(f) motion to compel stipulation if a party refuses to comply regarding stipulations. That rule is for formal discovery, though, requiring the submission of the motion 45 days prior to the calendar call. When a petitioner is not compliant on the date of calendar call, the Rule 91(f) motion to compel is not timely.

In the alternative, the parties can submit a case fully stipulated to a judge under Tax Court Rule 122. Keith wrote about the perils of submitting a case fully stipulated here.

The third tip is to let the witnesses testify. If you are building your case on what the witness is saying, you should not have the attorney testifying instead. For example, when an attorney is questioning his or her own witness, do not do that by a series of leading questions. The judge finds that boring. Instead, let the questions be open so that portion of the trial is about the witness’s testimony. Then, you have something to cite to if you need to file a brief following the trial.

If you have a slow witness, you can signal that to the Court if you need to use leading questions. It should not be the default place to start when you are questioning your witness.

Fourth, settle the minor issues. Attorneys often want to argue the major issues and will focus a trial in a clash on the big topics. The judge, on the other hand, needs to make sure everything gets resolved for the issues in the case. He said that judges often have to spend the most time in an opinion making decisions on the minor issues. If counsel does not want to spend time focused on minor issues, they should settle those and get them out of the way for all concerned.

The fifth tip regards using experts. Tax Court Rule 143(g) requires the submission of expert reports 30 days before calendar call. Submitting the reports in a timely fashion allows opposing sides enough time to object before trial so they are not objecting at day 1 of the trial. By not waiting until the last minute, that will help the trial to flow smoothly rather than dealing with objections regarding experts at the start of trial.

Effective cross-examination of the other side’s witness will show the inconsistencies in the other side’s case. It can then become a battle of the experts to show which side has the better expert backing up the case. It is essential for the attorney to read the expert reports for both sides. There have been trials where the attorney was not familiar with the subject an expert would testify on and looked bad when it came to questioning the expert.

Sixth, it is always a good idea to review the Evidence rules on objections and leading questions prior to trial. A quick refresher can be quite handy to stay current and use proper court procedure at trial.

Last, follow the judge’s direction on when to file briefs with the Court. A brief is your last chance to provide to the judge the opinion you want the Court to render. Do not use words like “definitely”, “clearly” or “obviously” when arguing your side of the case. For your requested findings of fact, do not quote to the entire record, but cite a specific page or paragraph in the transcript.

While there were other topics discussed in the informal question and answers, Judge Vasquez’s presentation on trial tips certainly gave those in attendance useful material to use when dealing with Tax Court.