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 Kansas City Tax Clinic, the Legal Aid of Western Missouri Low Income Taxpayer Clinic and the Kansas Low Income Taxpayer Clinic. He records and edits a tax podcast called Tax Justice Warriors.

Several Things You Should Avoid With Your Taxes: Designated Orders 2/18/19 to 2/22/19

Designated Orders:  Several Things You Should Avoid With Your Taxes (2/18/19 to 2/22/19)

While there was a flood of designated orders immediately after the government shutdown ended, that was the height of the wave.  This week is at low tide for the number of designated orders because there are only four orders to discuss.  While there aren’t too many items of substance to discuss, each order has some interesting points on what to avoid with the IRS or Tax Court.

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There’s a Limit on Tax Benefits for Education

Docket No. 2805-18S, Tanisha Laquel Saunders v. C.I.R., available here.

In the past, one of my jobs involved taking questions from tax professionals, doing research, and providing written responses concerning their tax situation.  During that time, I answered several questions concerning tax situations for students.  I grew familiar with IRS Publication 970, Tax Benefits for Education, and used that as a starting point to answer several questions for what would be allowed on particular tax returns.

If you were to read through IRS Publication 970, a theme that you would find is that the IRS does not allow an individual to use the same qualified education expenses to claim multiple tax benefits.

That is the background for the case in question, which comes to us by a bench opinion from Judge Carluzzo.  The petitioner was a full-time student at Los Angeles Pierce College.  She received a Pell Grant to pay tuition and related educational expenses, with the remainder going to personal and living expenses.  The petitioner chose to exclude from her income the portion of the Pell Grant used for qualified education expenses.  This is a correct tax treatment of a Pell Grant with regard to qualified education expenses.

Where the petitioner went wrong is that she also decided to use those expenses for an education credit.  The bench opinion only refers to the education credits allowed under Internal Revenue Code (IRC) section 25A.  While the type of credit is not named, it was likely an American Opportunity Credit since the petitioner claimed both a nonrefundable and a refundable portion of the credit.

The judge does “congratulate and commend petitioner on pursuing her formal education”, but that does not prevent him from applying the law to the case.  The judge sustains the IRS disallowance of the section 25A education credit, deciding in favor of respondent.

Takeaway:  You are not allowed to double-dip when it comes to education-related tax benefits on the same expenses.  Perhaps the petitioner could have used better tax planning by making the Pell Grant full taxable and then taking an American Opportunity Credit.  Where she got caught by the IRS was where she excluded the Pell Grant from income, but also claimed the education credit.  A taxpayer just cannot get two or more tax benefits from the same education expenses.

 

The Petitioner’s Representative

Docket No. 14578-18SL, Barry J. Smith v. C.I.R., available here.

I don’t have too much to say on this case.  It is another example of a petitioner with a Collection Due Process (CDP) case who did not do much before the IRS filed a motion for summary judgment, leading to a decision for the IRS.

What caught my eye was a paragraph on the petitioner’s history.  It stated that the petitioner’s representative asked for additional time to provide financial materials on the date that they were due (and got an extension).  Next, when the settlement officer attempted to contact the representative for the scheduled telephone conference, there was no answer.  The settlement officer left a message, stating no information had been received and a notice of determination would be issued sustaining the proposed levy.  Later that day, the representative called back, explaining that his paralegal had been out.  The representative indicated he planned to speak with petitioner the next day and hoped promptly to get back to the settlement officer with the required information.  Nothing further was heard from the petitioner or his representative and no materials for consideration were submitted.

Takeaway:  While we do not have the full story, my read on the situation is that the petitioner’s representative might also have been at fault.  Whether that is the case or not, it is best if a petitioner’s representative helps the petitioner instead of adding to the case history of non-responsiveness to the IRS.

 

How Not to Deal With Tax Fraud

Docket No. 1395-16 L, Harjit Bhambra v. C.I.R., available here.

The IRS issued a Collection Due Process determination to sustain the filing of a notice of federal tax lien for restitution-based assessments and fraud penalties related to tax years 2003 and 2004.  Petitioner appealed to the Tax Court. The Tax Court granted an IRS motion for summary judgment with respect to the restitution so what was at issue in this order was petitioner’s liability for the fraud penalties (the petitioner was able to have a CDP hearing regarding his liability because the liability was not subject to deficiency procedures).  The Court issued an order remanding the case to IRS Appeals for a supplemental hearing where the petitioner could raise a challenge to the determination of the fraud penalties.

The Appeals Officer then sent a letter scheduling a telephone conference and the petitioner replied with his own letter.  That letter demanded an in-person hearing that he would record, plus he also made inflammatory statements, such as “that the IRS agents are well qualified liars that cannot be trusted for any reason” and the District Court judge in his criminal trial is a “reckless buffoon”.  Again, he submitted no evidence against the civil fraud penalties.  After a telephone conference, the petitioner again did not submit anything to refute the penalties.

In the IRS supplemental notice of determination, Appeals found the Examiner was correct to assert IRC section 6663 penalties because all or part of the underpayment was due to fraud, the petitioner was criminally convicted per IRC section 7206(1) and 7206(2) for making a false tax return, and he presented no new evidence why he is not liable for the penalties.

After receiving the parties’ status reports and the supplemental notice of determination, the Tax Court tried to reach out to the parties to see how to proceed.  They were unsuccessful in December 2018, which was followed by the government shutdown, with no success reaching the petitioner at the beginning of February 2019.  On February 11, petitioner did not answer his phone at the agreed-upon time.  In response to attempts to reschedule the call on February 13, petitioner responded:  “I’m working on February 13, 2019, and vacationing from 2-14-19 to March 8, 2019, please send me in writing whatever the [judge] has for this case.”

In this order, the judge’s response is:  “We will take petitioner up on his invitation.  We assume that, in asking for us to send whatever we have in writing, petitioner seeks no further hearing and has no argument to make.”  The judge sees no reason why decision should not be entered for the IRS to continue with collection of the restitution amount and the civil fraud penalties for 2003 and 2004.  The petitioner is ordered to show cause on or before March 19, 2019, why there should not be a decision entered as described.

Takeaway:  I always find that politeness and responsiveness go a long way to helping a court case.  The petitioner might not have avoided a decision against him, but it would not have hurt.

 

“No Trade or Business” or Cause for Alarm

Docket No. 8724-18 L, Jeffrey P. Heist v. C.I.R., available here.

Mr. Heist owned and operated US Alarm Systems, an alarm system installation and servicing business.  For 2013 and 2014, he worked as a sole proprietor and filed a Schedule C on his tax returns to report his income.  For 2015, Mr. Heist conducted his business through an S corporation and reported that income on Part II of Schedule E on his tax return.  He had no other source of income than that alarm system business during those years.  During those years, his customers used forms 1099-MISC to report payments they made to the business.

Mr. Heist filed tax returns for those years with a CPA on September 1, 2016.  He reported either net profit on Schedule C or S corporation income on Schedule E, respectively, along with tax and penalties (including self-reported estimated tax penalties).  He did not make estimated tax payments, had no payments as offsets against the tax or penalties and did not submit payment with the returns.

The IRS processed the returns and the amounts owing went unsatisfied, so the IRS sent a notice of intent to levy and notice of lien filing.  This prompted him to amend his tax returns for the years in question.

How did Mr. Heist choose to amend those returns?  He reduced his income, tax and penalties to zero for all three tax years.  In support, he attached “corrected” Forms 1099-MISC he created, purporting to “correct” to zero the amounts of income paid by the customers of his alarm system business.

What is Mr. Heist’s justification for these amendments? His main argument is that he and US Alarm Systems performed no “trade or business” activities as defined in USC Title 26 Section 7701(a)(26).  That defines the term “trade or business” to include performance of the functions of a public office, which Mr. Heist reads to exclude any other activities. The order cites multiple Tax Court Memorandum Opinions that have found this argument to be baseless and frivolous.

Not surprisingly, the IRS deemed the amended returns frivolous and invalid, eventually assessing frivolous return penalties under IRC 6702(a).  The IRS sent new notices of intent to levy and of filing a federal tax lien, and Mr. Heist requested a CDP hearing.  In the request, he states:  “I submitted simple arithmetic and sworn rebuttals to erroneous information returns and bad ‘payer’ data sent to IRS by those I contracted with for the years in question.  I made no claims for refund, overpayment or credit.  I simply require the record be corrected.”

Mr. Heist was not asking for money from the IRS, so what’s the harm, right?  Mr. Heist maintained at the telephone hearing and throughout the administrative process that he did not submit a frivolous return justifying any penalties.  Other things he did not do were request any collection alternatives, provide any documents in support of alternatives, or argue that the tax lien should be withdrawn.

On April 25, 2018, the IRS issued a Notice of Determination sustaining the penalty assessments, the notice of lien, and the proposed levy.  Mr. Heist timely appealed to the Tax Court, maintaining the same arguments.  The IRS filed a motion for summary judgment which the petitioner opposed.

The Court analyzed the case and found that the frivolous return penalties were justified and the settlement officer did not abuse her discretion.  The IRC 6702 penalties are $5,000 for each of the three tax years at issue.  The IRS’s motion for summary judgment was granted because there was no genuine dispute of material fact.

In addition, the Court advised the petitioner of IRC section 6673(a)(1), which authorizes the Tax Court to impose a penalty up to $25,000 when it appears proceedings have been instituted or maintained primarily for delay or that a position is frivolous or groundless.  The IRS did not seek such a penalty and the Court decided not to impose it sua sponte.  However, the Court warns Mr. Heist that they may not be so forgiving if he returns in the future to advance frivolous and groundless arguments.

Takeaway:  Mr. Heist originally had a tax liability over $20,000.  For some reason, he got it in his head to amend those returns and change the Forms 1099-MISC as if everything filed with the IRS for 2013 to 2015 related to his business did not exist.  This bright idea didn’t quite double his IRS debt, but brought $15,000 more in IRS penalties and a stern warning from the Tax Court about further penalty if he returned there again with frivolous arguments.  Let this serve as an example of actions to avoid with the IRS and the Tax Court.

Designated Orders: Bench Opinions and the Designated Orders Panel (12/24/18 to 12/28/18)

With the holidays and the beginning of the government shutdown, there were not many designated orders during the week of December 24 to December 28, 2018. In fact, Judge Carluzzo provided our lone orders, two bench opinions from Los Angeles to close out the year. Both of these bench opinions involve petitioners that seem to try Jedi mind tricks to convince the IRS that a letter they sent is actually different than what it appears to be.

Since it is a light week, I am also going to give an account of the designated orders panel from last month’s Low Income Taxpayer Clinic (LITC) grantee conference.

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Bench Opinion 1

Docket Nos. 10878-16 and 7671-17, Luminita Roman, et al., v. C.I.R., available here.

Luminita and Gabriel Roman, the petitioners, appeared unrepresented in Tax Court and Luminita spoke on their behalf. Their argument is that the notices of deficiency issued to them were not valid and the Tax Court does not have jurisdiction in their cases. In fact, neither notice of deficiency was valid because they were not authorized by an individual with the authority to issue the notices of deficiency. In their view, each notice was generated by a computer, and computers have not been delegated authority by the Commissioner to issue notices of deficiency. The petitioners cited Internal Revenue Manual provisions as support. Judge Carluzzo states: “In that regard, we wonder if petitioners are confusing the authority to issue a notice of deficiency with the mechanical process of preparing, creating or printing one, but we doubt that we could convince petitioners to recognize that distinction.”

Judge Carluzzo goes through the analysis, noting the necessity for a valid notice of deficiency for Tax Court jurisdiction. Next, he states that the lack of a signature does not invalidate a notice of deficiency and the notices in question were issued by offices or officers of the IRS authorized to do so. Overall, the petitioners failed to meet their burden of proof that the notices of deficiency were invalid and their motions must be denied.

Takeaway: This was a bad argument to make in Tax Court. Without any proof that a notice of deficiency is invalid, an argument like this is a long shot at trying to stop the IRS. It is better to argue the deficiency or other merits of the case than to make a claim that a notice issued by the IRS is invalid because they used computers.

Bench Opinion 2

Docket No. 25370-17SL, Roy G. Weatherup & Wendy G. Weatherup v. C.I.R., available here.

The petitioners appeared unrepresented in Tax Court, though Roy Weatherup is an attorney. As background, the Weatherups made payments on a tax liability for tax year 2012. After financial hardships, they submitted an Offer in Compromise that was rejected. During the period when the offer was pending, the couple continued to make payments on the liability. Following the rejection letter, the IRS issued a notice that their 2012 liability was subject to levy. The liability amount listed in that notice was computed as though the offer had not been accepted.

The Weatherups were eligible to request a Collection Due Process (CDP) hearing and did so. In the hearing, they took the position that their liability was fully paid due to the Offer in Compromise they submitted. They state the rejection letter does not satisfy the requirements of Internal Revenue Code section 7122(f). Since their view was that the offer was not rejected within 24 months from the date of submission, the offer was deemed accepted. In their view, the IRS rejection letter was only a preliminary rejection letter.

In their view, the rejection failed to take into account their financial hardship at the time and was otherwise inequitable, leading to an abuse of discretion. Even though they were invited to do so by the settlement officer, they chose not to submit a new Offer in Compromise.   They also did not propose any other collection alternative to the proposed levy.

Judge Carluzzo finds that the rejection letter meets the requirements of IRC section 7122(f) and was issued within the requisite 24-month period. He disagreed that it was a preliminary rejection letter because it meets the specifications of a rejection letter for an offer.

Since their offer was rejected, the liability remained with the IRS. Because the petitioners did not provide an alternative during the CDP hearing, there was nothing further to review. The expectation that the settlement officer would review the Offer in Compromise was misplaced as that was not the subject of the CDP hearing.

Judge Carluzzo granted the IRS motion for summary judgment, noting that the Weatherups would still be eligible to submit a new Offer in Compromise.

Takeaway: Again, the petitioners have taken an incorrect view of IRS procedure and based their arguments in Tax Court around it. While the IRS does issue preliminary determinations in innocent spouse cases, those are clearly designated “PRELIMINARY DETERMINATION.” The IRS does not issue such notices regarding an Offer in Compromise so it is an error to expect one there. Even if the IRS had issued a preliminary rejection letter for their offer, why did the Weatherups then act as if the liability disappeared? This is another case where the petitioners needed to get their facts straight before they presented their arguments to the judge.

The Designated Orders Panel at the LITC Grantee Conference – December 4, 2018

For the LITC Grantee Conference, both Samantha Galvin and I were contacted to present on “Recent U.S. Tax Court Designated Orders.” Since that was half of the group that rotates through the blog postings on this website, we contacted Caleb Smith and Patrick Thomas to see if they would like to be included on the panel. Caleb was busy with organizing and moderating for the Low-Income Taxpayer Representation Workshop that would take place the day before the panel, but Patrick Thomas agreed to join the panel to discuss designated order statistics that he previously wrote about on this site here.

Keith Fogg introduced the panel, speaking about the nature of designated orders and the decision to start featuring designated order analysis on Procedurally Taxing since no other venues were paying attention to designated orders. Samantha and I alternated the beginning portions with Patrick finishing on the statistical analysis.

I began by introducing the designated orders group and Samantha talked about the nature of designated orders, comparing them with non-designated orders and opinions. She next spoke about the limited availability of designated orders through the Tax Court website (possibly available 12 hours on the website and then no longer searchable as a designated order) and showed the audience where the orders are available on the website.

Samantha spoke about lessons for taxpayers, saying that they should avoid being tax protesters because of potential section 6673 penalties. Also, taxpayers should respond in a timely fashion and they bear the burden of proof for deficiency and CDP cases.

I followed up on Samantha’s lessons for taxpayers. I reminded the group that the Tax Court does not have jurisdiction over petitions that are not timely filed. I talked some about nonresponsive petitioner issues as I had here. Basically, petitioners that do not know court procedure and represent themselves in court are likely doing themselves a disservice. Petitioners also need to respond to court filings, substantiate their claims and have organized documents to submit to the IRS. I used some examples from recent designated orders for actions petitioners should avoid.

Next, Samantha turned to lessons for IRS and taxpayer counsel, looking at motions for summary judgment (following Rule 121, that there must be a genuine dispute of material fact to defeat the motion, with a reminder that the motions can be denied). She reminded the audience that communication between the parties is key, and that developing a comprehensive administrative record by writing letters to Appeals with everything discussed about the case is a helpful practice. Finally, it is best to follow informal discovery procedures and to treat a motion to compel as a last resort.

I tried to give a capsule judicial history of Graev v. Commissioner and Chai v. Commissioner, touching on the IRS penalty approval process. I noted that Judge Holmes gave factors for the standard for reopening the record which are that the evidence to be added cannot be merely cumulative or impeaching, must be material to the issues involved, and would probably change the outcome of the case. Additionally, the Court should consider the importance and probative value of the evidence, the reason for the moving party’s failure to introduce the evidence earlier, and the possibility of prejudice to the non-moving party.

Two months later, Judge Halpern used different factors. He stated the factors the Court has to examine to determine whether to reopen a record are the timeliness of the motion, the character of the testimony to be offered, the effect of granting the motion, and the reasonableness of the request. The third factor, the effect of granting the motion, is the most relevant.

It was my question why there are two different sets of factors the Tax Court uses to determine whether to reopen a record in these IRS penalty approval cases.

I also provided the standard for whistleblower cases, noting that the petitioners are not very successful in succeeding at Tax Court. Internal Revenue Code section 7623 provides for whistleblower awards (awards to individuals who provide information to the IRS regarding third parties failing to comply with internal revenue laws). Section 7623(b) allows for awards that are at least 15 percent but not more than 30 percent of the proceeds collected as a result of whistleblower action (including any related actions) or from any settlement in response to that action. The whistleblower’s entitlement depends on whether there was a collection of proceeds and whether that collection was attributable (at least in part) to information provided by the whistleblower to the IRS.

Patrick then discussed the designated orders statistical analysis project. The project reviewed 525 unique orders between May 2017 and October 2018 (623 total orders, with duplicate orders in consolidated cases). During the presentation he spoke about the utility of designating orders (such as the speed to designate an order compared to publishing an opinion). From there, he looked at which judges predominantly use designated orders and the types of cases and issues conducive to designated orders. Patrick focused on a one year period (4/15/17 to 4/15/18), with 319 unique orders. For the breakdown regarding types of cases, judges and more, I recommend you go to the link above to view Patrick’s work.

Patrick had several takeaways to conclude the panel. First, a substantial number of judges (13) do not designate orders or seldom designated orders. Do those judges substantially issue more opinions? Are their workloads substantively different from those who issue more designated orders?

Second, three judges (Gustafson, Holmes and Carluzzo) accounted for nearly half of all designated orders. Why is there such a disparity between these judges and the rest of the Court?

Third, judges issued only 112 bench opinions during the research period. That was a small amount compared with the overall number of cases (2,244 cases closed in April 2018 alone). Of the 112 bench opinions, only 26 (23%) were designated. Judges might consider designating those orders so they highlight their bench opinions to the public.

Last, there is a disparity between small cases on the docket (37% of all cases) and designated orders in small tax cases (12.85% of all designated orders). Are small cases simply too routine and less deserving of highlighting to the public?

Later in the week, we found out more information from the judges themselves. There is a process when submitting a Tax Court order electronically where a judge selects that the order becomes designated. Some judges find the process more expedient than the published opinion process. One judge I spoke with did not find too much value in our study of designated orders but was glad we were able to gain from the process.

 

 

Designated Orders: A Mixed Bag – Easements and Common Issues (11/26/18 to 11/30/18)

William Schmidt of Legal Services of Kansas brings us this weeks designated orders. The orders this week contain a lot of meat. Two of the orders deal with expert witnesses and problems with those witnesses. In one case the IRS seeks to exclude a petitioner’s expert because the expert is a promoter of tax schemes rather than a true expert and in another case petitioner seeks to exclude respondent’s expert because the expert destroyed the material he thought was not relevant to his expert opinion. Many other matters, particularly regarding conservation easements, deserve attention in these orders as well. Keith

The week of November 26 to 30, 2018 had seven designated orders. The week was a mixed bag. Some orders focused on less common issues like charitable contributions of easements, while other orders looked at routine deficiency or Collection Due Process issues.

Easement Issues, Part One

Docket No. 29176-14, George A. Valanos & Frederica A. Valanos v. C.I.R., available here.

To begin with, this designated order is 30 pages. Most designated orders do not reach a page count in the double digits so it is a rarity to find one this long. As a result, there are multiple items to discuss that I will be summarizing.

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The petitioners asked the Court to determine whether the IRS improperly denied their non-cash charitable contribution deduction for a conservation easement in tax years 2005 to 2007. The IRS filed a motion for partial summary judgment that the Court denies. The sole issue stated for decision is whether the petitioners’ conservation easement deed of gift satisfied the perpetuity requirements of IRC section 170(h)(5) and 26 C.F.R. sections 1.170A-14(g)(2) and (6). Because of the genuine dispute as to material facts, Rule 121(b), and a lack of clarity and specificity in the parties’ contentions of law, the Court denied the IRS motion for partial summary judgment.

For background, the order discusses the subject property, the mortgages affecting the subject property and the conservation easement, the subordination agreements, the conservation easement, the petitioners’ tax returns and charitable deduction disallowance, and the Tax Court proceedings.

Of note is that the recalculations of petitioners’ tax liabilities resulted in deficiencies of $192,486 for 2005, $153,742 for 2006, and $104,662 for 2007. The IRS also determined that the petitioners were liable for gross valuation misstatement penalties under section 6662(h) or, in the alternative, section 6662(a). On September 3, 2014, the IRS issued a notice of deficiency, and the petitioners timely mailed their petition to Tax Court.

The Commissioner moved for partial summary judgment on the grounds that the Greater Atlantic Bank subordination was defective and therefore the conservation easement did not meet the requirements for the charitable contribution deduction. The IRS appeared to initially concede any issue with the Wells Fargo deed of trust.

After the parties fully responded to the motion for partial summary judgment, the Court issued its opinion in Palmolive Bldg. Investors, LLC v. Commissioner, 149 T.C. ___ (Oct. 10, 2017), (discussed below). The Court issued an order that invited the parties to file supplemental memoranda addressing the implications for this case.

In its supplemental filings, the IRS arguments are that similar to the Palmolive subordinations, the Greater Atlantic Bank and Wells Fargo subordinations failed to adequately meet the requirements of subordination of the lenders’ interests in insurance proceedings. The IRS reiterated the Greater Atlantic Bank argument but added the argument that the Wells Fargo subordination did not meet requirements because it did not use the term “subordinate.”

The petitioners responded with arguments that the conservation easement and subordination agreements are valid, all section 170 requirements are satisfied, and they are entitled to all the deductions taken on their original returns.

In the discussion, the order begins with general principles and reviews the principles of summary judgment, conservation easements under section 170(h), the perpetuity requirement of 26 C.F.R. section 1.170A-14(g) (broken down into mortgage subordination and extinguishment proceedings), the relation of federal taxation and state law property rights, real property ownership and mortgage theory (looking at sections on real property ownership, legal interests and equitable interests, and mortgage theory), and District of Columbia’s real property law (with this section looking at mortgages in the District of Columbia, deeds in the District of Columbia, and conveyances of personal property in the District of Columbia).

Next in the discussion is the parties’ contentions, broken down between the Greater Atlantic Bank deeds of trust and their subordination agreement, and the Wells Fargo deed of trust and its subordination agreement.

Third in the discussion is the analysis portion. The first part of the analysis begins by stating that factual disputes are not resolved under Rule 121.

Next is that Section 1.170A-14(g)(2) requires subordination of mortgages. This second part includes sections on the need for attention to local law, Greater Atlantic Bank’s subordination agreement and the Wells Fargo subordination. The Greater Atlantic Bank subordination agreement section looks at the sufficiency of one general subordination agreement for two deeds of trust, the undated subordination agreement, and compliance with District of Columbia law’s recording and other requirements (broken down further into application of state-equivalent real estate law and recording requirements – validity as to third parties). The Wells Fargo subordination looks at the failure to use the verb “subordinate” and subordination or conveyance of an executory interest.

The third part of the analysis looks at the Section 1.170A-14(g)(b) requirement that the donee receive a proportionate share of extinguishment proceeds. This is broken down further to look at Greater Atlantic Bank’s subordination as to proceeds and Wells Fargo’s subordination as to proceeds.

The fourth part of the analysis turns to mortgage theory in light of conservation easements.

The order then turns to unanswered questions. The Court provides a list of nineteen unanswered questions, stating that thorough answers to these questions would allow the Court to analyze the parties’ respective arguments and reach a conclusion of the issues discussed within the order.

In the conclusion, the Court states disputes of fact exist and that the statements from both parties need further explanation and citations to legal authority.

Judge Gustafson orders that the IRS motion for partial summary judgment is denied. The facts assumed in the order are not findings for trial, and each party must be prepared to prove the relevant facts. No later than December 21, 2018, the parties must file a joint status report (or separate reports if that is not expedient) with their recommendations as to further proceedings in this case.

Takeaway: If you want to experience the complexity of the discussion, issues and questions in this case, I recommend you click the link above. This order dives deeply into an examination of the interaction between various areas of law, such as property (subordination agreements, mortgages, and conservation easements) and tax (charitable contribution deductions) while balancing the intersection of federal law and District of Columbia law.

Easement Issues, Part Two: The Palmolive Orders

Docket No. 23444-14, Palmolive Building Investors, LLC, DK Palmolive Building Investors Participants, LLC, Tax Matters Partner v. C.I.R.

The Tax Court issued an opinion in this case, 149 T.C. No. 18 (Oct. 10, 2017), holding that Palmolive is not entitled to a charitable contribution deduction for the contribution of a façade easement because of their failure to comply with certain requirements of IRC section 170. It is still at issue regarding Palmolive’s liability for IRS penalties asserted, which is set for trial commencing January 22, 2019, in Chicago, Illinois.

  • Order 1 available here. The IRS filed a motion for leave to file a second amendment to their answer, where they would supplement the answer with an allegation that Palmolive’s appraiser was a “promoter” and therefore not a qualified appraiser. The Court grants the motion for leave to amend, but the IRS needs to transmit a detailed written statement of the facts on which it will rely at trial to support its contention he was a “promoter.” Palmolive’s assertions in their opposition are deemed to be requests for admission for the IRS to respond to under Rule 90.
  • Order 2 available here. Palmolive filed a motion for summary judgment and the IRS filed their own motion for partial summary judgment in response. In a conference call with the parties, Judge Gustafson explained his expectations as to how he is likely to rule on the issues raised in the motions. He suggested that Palmolive “might wish to forego further filings on the motions and instead use its time to prepare for trial.” Palmolive’s counsel stated there would be no further filing on the issues 2 to 4, but would file a reply as to issue 1. The judge stated he expects to grant the IRS motion on issue 4, regarding the IRS written supervisory approval of the initial determination of penalties in compliance with IRC section 6751(b), but that the order or opinion might not be issued until soon before trial. The parties are to prepare for trial on the assumption that issue 4 will not be a subject of trial. Note: there was a subsequent designated order on issue 1 that will potentially be addressed in another blog post that is available here. Spoiler alert: Palmolive loses on issue 1.

Takeaway: This is a case with multiple filings and has complexity. One takeaway from these orders is that when the judge tells you not to do something it is in your best interest to comply.

Motion to Strike

Docket No. 14214-18, Pierre L. Broquedis v. C.I.R. (Order here).

It is not often that we see a Motion to Strike in a Tax Court case. Here, Petitioner states paragraphs and exhibits in Respondent’s answer are false or not concise statements of the facts upon which Respondent relies.

The Court cites Tax Court Rule 52, where the Court may order stricken from any pleading any redundant, immaterial, impertinent, frivolous, or scandalous matter. The Court states that motions to strike are not favored by federal courts. Matters will not be stricken from a pleading unless it is clear that it can have no possible bearing on the subject matter of the litigation. Additionally, a motion to strike will not be granted unless there is a showing of prejudice to the moving party.

The Court concludes the allegations and exhibits bear a relationship to the issues in the case. Also, petitioner failed to show that he would be materially prejudiced by a denial of his motion to strike. The Court then ordered to deny the motion to strike.

Takeaway: Since the Court states that motions to strike are not favored by federal courts, they should be avoided. While Rule 52 spells out the Court’s ability to order material stricken, this case illustrates that there are rare circumstances when the Court will grant such an order.

The Numbers Don’t Match

Docket No. 7737-18, Kelle C. Hickam & Nancy Hickam v. C.I.R. (Order here). Petitioners filed their petition with 6 numbered statements in their paragraph 5. Respondent filed an answer, admitting to certain paragraphs in the petition. Petitioners, thinking that the IRS partially conceded the case, submitted a motion for partial summary judgment. The Court states: “Petitioners, however, appear to believe that respondent’s numbered paragraphs in his answer refer to their numbered responses in the petition’s paragraph 5. They do not. Respondent’s paragraphs in his answer refer to the numbered paragraphs on the petition.” Since there are genuine disputes of material fact, the Court denied the motion.

Takeaway: While I understand that court documents are not always easy to understand, it would have been wise for these unrepresented petitioners to talk about the pleadings with someone who is familiar with court procedure. It should be a simple step to match the paragraphs between the Petitioner’s petition and the Respondent’s answer. The IRS is not going to concede material issues when they file an Answer. You’re not going to get that lucky.

Miscellaneous Short Items

  • Supervisor Conspiracy – Docket No. 15255-16SL, Robert L. Robinson v. C.I.R. (Order and Decision here). The petitioner mentions that his supervisor obstructed/impeded his payments and that there was a conspiracy. Otherwise, this looks to be a routine Collection Due Process case, granting the IRS motion for summary judgment because they followed routine procedures.
  • Materials Destroyed – Docket No. 20942-16, Donald L. Bren v. C.I.R. (Order here). Petitioner filed a motion in limine to exclude from evidence the report of respondent’s expert, Robert Shea Purdue, because he deliberately discarded documents and deleted electronic records investigated but disregarded in reaching the conclusions set forth in his report. The Court granted that motion.

 

 

Designated Orders: The Nonresponsive Petitioner (10/29/18 to 11/2/18)

This week’s post on designated orders is written by William Schmidt of the Kansas Legal Aid Society. Similar to the statistical post on designated order provided by Patrick Thomas a few weeks ago, William uses a slow week in designated orders to provide us with a reflective post on one of the root causes of trouble in Tax Court and with the tax system generally. Keith

The week of October 29 to November 2, 2018 had a total of three designated orders. To begin, the first order, here, is a short order regarding a joint filing of a stipulation of settled issues.

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Short Take: Docket No. 21940-15 L, James L. McCarthy v. C.I.R.

The second order, here, discusses ownership of real estate by a trust that IRS Appeals determined has been acting as the petitioner’s nominee. The petitioner has submitted both an offer in compromise and a partial payment installment agreement. Since Appeals determined the petitioner is connected with the trust, it becomes a factual issue regarding the real estate in question being an asset of the trust (affecting petitioner’s assets to determine his collection alternatives listed above). The IRS stance is that the property in question could be used to satisfy petitioner’s liability. The parties are to submit their memoranda regarding their arguments concerning the ownership of the property and petitioner’s ability to enjoy its benefits or treat it as his own during the ownership period by November 14.

The Nonresponsive Petitioner and Related Issues

Docket No. 18347-17 L, Kazuhiro Kono v. C.I.R., available here.

This case does not offer much for analysis. The petitioner did not submit requested documents to the IRS, did not respond to a second request, did not file a response to the IRS motion for summary judgment, and did not appear at the Tax Court docket. As a result, the Tax Court granted the IRS motion for summary judgment based on petitioner’s overall lack of responsiveness.

Since there is not much to focus on this week, I am going to take a detour and focus the rest of the blog post on an examination of the responsiveness of taxpayers during the Tax Court process. I am working on a presentation with some of the others who post here on designated orders so I have been doing some big picture thinking about Tax Court and designated orders.

  1. Types of Clients

In practice, I get to meet several types of clients. There are four categories I can think of who inherently have issues in dealing with IRS bureaucracy:

  • Low Income Taxpayers – The inability to afford higher education may be the beginning of barriers to understanding tax issues for some low income taxpayers. Another is the inability to take time to communicate with the IRS. Taxpayers often cannot take off work in order to have time to wait on the phone in order to deal with tax issues, especially if they are on a tight budget. The lack of funding for the IRS has increased wait times in order to talk with a customer service person on the phone, which leads to dissatisfaction and quitting attempts to deal with the IRS.
  • Disabled – There can be many categories here, whether physical or mental disabilities. If a taxpayer does not have the energy, ability or capacity to deal with tax issues, that person might be confused by the tax system or give up because it takes too much to handle.
  • Elderly – Again, this group may be declining in health or mental ability and lack the energy, ability or capacity to deal with tax issues.
  • English as a Second Language – I am using this category to cover all those who have difficulty with English, whether they are immigrants to the United States or not. Those who do not speak the language or understand American culture have that additional barrier to add to issues with understanding tax terminology or dealing with the IRS.

One client of mine has a case regarding financial disability (see past Procedurally Taxing postings here and here). She had paranoia and a nervous breakdown that prevented her from signing her 2012 tax refund before the 3-year deadline expired. I have had to be extra patient to work with her to fill out paperwork and get medical support regarding her disability. I am trying to prove that her medical issue should allow her an exception to the 3-year deadline.

Another client is a Spanish speaker who was audited for claiming her grandchildren as dependents and including other child-related benefits. After providing rounds of documents to the IRS, she was tired and got to the point where she did not want to gather more documents for me to provide to the IRS. I am glad to say that we have been successful in convincing the IRS to allow her to claim those dependents, but they wanted me to speak with my client about substantiating her future claims correctly.

  1. Nonresponsiveness

In surveying several of the past designated order postings, I looked for patterns of nonresponsive petitioners. Some of the broadest patterns are the lack of providing documents and ignorance of procedures.

Often, the IRS requests that a client fill out a Form 433-A or submit unfiled tax returns. For disorganized clients, that is an uphill battle, discussed more in the next section. Additionally, filing tax returns (especially in the off-season) may be a cost that taxpayers are unable to overcome.

For the unrepresented taxpayers, it does seem like they have a do-it-yourself mentality. Unfortunately, that means their courage leads them into areas for which they are not prepared. These taxpayers venture into areas of court or tax procedure they are ignorant of and it often leads to their detriment when the Tax Court finally grants the IRS motion for summary judgment.

To begin, there are some basics of court procedure that non-attorneys should realize they need to follow. They should show up in court for all hearings on their cases. If their case is scheduled for a calendar call, trial or any other special hearing, pro se petitioners should realize they need to show up. Participation in any legal hearing does not guarantee success, but it generally improves the judge’s opinion in the favor of those who appear unless the person is obnoxious.

Something else that should be obvious to unrepresented taxpayers is that they need to respond to court filings, especially the judge’s orders telling them to do so. By not responding to a judge’s orders, unrepresented taxpayers especially hurt their own cases.   It should be obvious to a taxpayer in Tax Court that doing something is often better than doing nothing.

One key piece a taxpayer should also realize is just what arguments are at issue. Collection Due Process (CDP) cases in Tax Court are one of the areas where taxpayers have problems. A CDP case in Tax Court concerns how the IRS treated the taxpayer. Were proper procedures followed? Did the taxpayer get his or her due process in treatment of the tax issue? A CDP hearing is not the place for the taxpayer to argue the merits of the tax at issue. Most likely, that ship has already boarded, sailed away, and docked at its port destination. Even though that is the case, there are still Tax Court petitioners trying to argue the merits of the tax at issue when they should be making arguments concerning due process.

This scratches the surface regarding complicated areas of court procedure. When it comes to hearsay or other trial arguments, taxpayers should be thinking about finding representation instead of making arguments without assistance.

The other area where taxpayers need to respond is regarding tax procedure. Ignorance of taxes will not serve people well in Tax Court. In looking at claims from child-related tax benefits to rental expenses, the common denominator is that the IRS requires substantiation for those claims.

I find it becomes necessary to be the middleman between my clients and IRS departments such as IRS Appeals or counsel. While my clients may have documentation regarding claims on their tax returns, I have found I need to translate communications from the IRS to the client and vice versa. It has also been necessary to organize documents so the IRS can review what the client has set aside. The IRS certainly does not like it when a taxpayer dumps unorganized documents in their lap as proof against the IRS audit. I went through the Tax Court process assisting a client who had boxes of documents. A current client has a suitcase of tax paperwork that needs to be organized for the IRS.

I think it is bizarre that taxpayers try to tackle areas of court and tax procedure when they are ignorant in those areas. I can understand that they want to save money, but they often ignore IRS notices about the LITC program. Several of them qualify for free assistance, but they choose to take on the IRS without any assistance at all. Why they do this makes no sense to me – they should at least call up the nearest LITC office to see what they have to say.

  1. Potential Solutions

A colleague (SueZanne Bishop) and I presented on “Gaining Independence Through Organized Financial Records” at the 2017 Kansas Conference on Poverty. While we did not have statistical data, we did have experiential learning to provide regarding the difficulties in working with clients to gather their financial data in areas of tax, family law, bankruptcy, estate planning and other areas of law. We spoke about the issues with handing an extensive form to clients to fill out regarding their assets, income, expenses or other financial data (such as IRS Form 433-A or forms used to expedite court filing). I also brought up how there may be additional steps involved in filling out a form, such as how the insolvency worksheet in IRS Publication 4681 needs financial information based on the date of a debt’s cancellation and not current financial information.

Some solutions we provided were giving clients more manageable chunks to a client (perhaps one page at a time) or regular meetings for each part of the form. I often talk through Form 433-F with clients rather than have them fill it out alone when I need that information in order to help them qualify based on their financial hardships for Currently Not Collectible status.

The theory behind our presentation was that helping clients to get organized now may give them assistance with greater problems in the future. Knowledge and the ability to budget would add to their skill sets. Organized data would reduce attentional strain (not dividing their focus between their finances and their children, for example). Adding this accomplishment might empower them to deal with the next problem and the next.

Often I think of how clients at legal aid organizations, LITCs, and other assistance programs would have difficulty dealing with their issues without the help we provide.

I do not know if the petitioner above, Mr. Kono, had any of the issues I mentioned. I wanted to provide alternative theories (not excuses) for why petitioners axre not as responsive as the IRS or the Tax Court would prefer. I know the IRS and the Tax Court try to educate taxpayers about the existence of the LITC program and I am dismayed why more do not ask for help. I also salute all pro bono volunteers who assist before and during Tax Court calendar calls.

Takeaway: I do not mean for this to be a blatant plug for the LITC and pro bono programs, but there is something to be said for those of us who act as the intermediaries between taxpayers and the IRS. The lack of IRS funding that in turn prevents quality customer service is but one of the barriers that taxpayers deal with so I wanted to provide another side of the story for the nonresponsive petitioners in these Tax Court cases. Potentially there is more to a petitioner’s story than laziness on why they did not do more in these cases.

 

 

Designated Orders: Penalties Imposed and Analysis of an Investment Firm (10/1/18 to 10/5/18)

Designated Order blogger William Schmidt from the Legal Aid Society of Kansas brings us this week’s orders. Keith

This week provides 4 designated orders. The batch includes two related orders regarding penalties for the same petitioner, analysis of an investment firm and an order concerning specific memos required before trial (Order Here). That order is a good example of what is needed in a pretrial memo in a case under regular tax case procedures: issues of fact and law, each party’s position and theories, expert witness testimony anticipated, and status of stipulations of facts.

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Tax Court Penalties Imposed

Docket # 16108-14 L, Rodney P. Walker v. C.I.R. (Order and Decision Here).

Docket # 9435-15 L, Rodney P. Walker v. C.I.R. (Order and Decision Here).

While there have been previous designated orders for Mr. Walker, his cases were not discussed here before. Each of the two cases are collection due process cases. One case concerns collection by levy for Mr. Walker’s unpaid 2007 and 2009 income taxes (16108-14) while the other case concerns collection by lien of his unpaid 2001 through 2007 income taxes. Otherwise, the orders are virtually identical yet ordered on two separate days.

Originally, Mr. Walker’s cases were remanded to IRS Appeals for a supplemental hearing on the issues listed above. The settlement officer provided him an explanation of how his 2007 and 2009 taxes were calculated and afforded him the opportunity to file returns claiming lesser taxes but he did not file those returns. Mr. Walker instead used the hearing to raise an issue previously ruled on by the Court.

The Court believed Mr. Walker used the period of remand primarily for delay and issued an order on August 27 to show cause that it was not a frivolous argument and why no penalty should be imposed. In fact, the penalty in question is from Internal Revenue Code (IRC) section 6673(a)(1). The section authorizes a penalty of up to $25,000 if the taxpayer has instituted or maintained proceedings before the Tax Court primarily for delay or if the taxpayer’s position is frivolous or groundless.

Mr. Walker did not respond to the August 27 order to show cause. The Court then imposes a section 6673(a)(1) penalty of $5,000 (it is my understanding that even though these are separate orders there would only be one penalty imposed). The Court orders that the IRS may proceed with the collection actions for the years in question.

Takeaway: The Tax Court is showing its teeth with regard to frivolous or groundless filings. While it is doubtful a petitioner that would file such a case is a reader of this blog site, it is worthwhile to note that the Tax Court is not afraid to impose penalties on petitioners trying to use the Tax Court just as a means of delaying IRS taking collection actions. While other cases have brought up the penalty without imposing it (giving little more than a slap on the wrist), this is a time where the Court made use of this power and imposed a decent penalty.

Was it a “Trade or Business”?

Docket # 8486-17, 8489-17, 8494-17, 8497-17, Richard M. Hellmann & Dianna G. Hellmann, et al., v. C.I.R. (Order Here).

GF Family Management, LLC (GFM) is an investment management firm owned and operated by members of the same family (the petitioners) and it is a family office as defined by federal securities law. The petitioners each hold a 25% profits interest in GFM and the assets managed by GFM were held by six investment partnerships. GFM held a 1% interest in each partnership, and trusts where the petitioners are the beneficiaries held (individually or collectively) the remaining 99% of each partnership.

GFM claimed expense deductions as a “trade or business” under IRC section 162. That would allow for GFM to claim ordinary business expense deductions for operating costs such as salaries, rent or investment expenses. The IRS contends GFM was actually engaged in activity “for the production or collection of income” or “for the management, conservation, or maintenance of property held for the production of income” under IRC section 212. That treatment would mean GFM’s expenses would be treated as miscellaneous itemized deductions subject to the 2% floor imposed by IRC section 67(a). The treatment will also be limited by application of the alternative minimum tax. Carryover of net operating losses are only permitted for a trade or business so that would also be limited for GFM.

Within this order, there is comparison to the fact situation in Lender Management, LLC v. C.I.R. Within that case, the Court emphasized the need to examine each case individually. In that case, the Court determined that it was in fact a trade or business.

Overall, the question is whether the owners of the family office are “actively engaged in providing services to others” (citing Lender Management) or are simply providing services to themselves. The Court provides factors for its analysis and proceeds to list factual issues it would like answered.

The parties are ordered to provide a joint status report by November 5. Within the report they are to express whether the facts will need to be developed at trial or to supplement the factual record through a stipulation of facts. Also, the parties will need to state whether the stipulation of facts could be submitted for decision without trial under Rule 122.

Takeaway: The IRS examination of this investment firm seems logical as the structure provides benefits to its family members. Is the firm actually a “trade or business” or is functioning in more of a self-serving capacity? The Court’s stance also sounds logical as the facts do not necessarily parallel the Lender Management facts so it is necessary to do further factual investigation to determine what kind of role the firm functions under. It is worth noting the major tax implications such a decision will result in for GFM, as listed above.

 

 

Designated Orders 9/3/18 to 9/7/18: A Plea Agreement, a Follow-up, and More Graev

We welcome designated order guest blogger William Schmidt from the Legal Aid Society of Kansas who writes on this week’s designated orders. In the first case petitioners make an argument that has been made before and failed. It fails again because their agreement in the criminal case about the scope of prosecution does not prohibit the IRS from pursuing them to determine their correct civil tax liability. Keith

For the week of September 3 to 7, there were 6 designated orders from the Tax Court. The first two are regarding two separate petitioners requesting to consolidate their cases and filing motions for summary judgment based on a plea agreement from prior litigation. The next 2 are a pair of orders that follow up from a previous posting (March). There is another Graev follow-up case. The final order, here, deals with a Collection Due Process hearing where petitioners question why they were audited for a home office expense when they were not audited in prior years.

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The Plea Agreement Does Not Cover Tax Court

Docket No. 22616-17, Krystina L. Szabo v. C.I.R., available here.

Docket No. 22560-17, Michael P. Martin v. C.I.R., available here.

This pair of Tax Court designated orders for a married couple are very similar, but distinct. In fact, the cases have so much in common, the couple filed motions to consolidate their cases, but those motions are denied.

Both petitioners were responsible for the daily activities of Pony Express Services, LLC. The company provided foster care and related services to persons with mental handicaps in western Virginia and maintained and operated three group homes there. Mr. Martin was the owner while Ms. Szabo was an employee and program manager.

In December 2006, the U.S. Attorney for the Western District of Virginia filed charges against the couple for conspiracy to defraud Medicare, Medicaid and the IRS. Among the charges were that the object of the conspiracy was to enrich the couple by falsely and fraudulently billing Medicaid for residential services not rendered and services not provided in the manner envisioned and required by Medicaid, plus maximizing the couple’s proceeds by utilizing what is called the foster home tax credit [actually referring to IRC section 131] when falsely informing their accountant they resided separately in two of the residential facilities.

The couple filed a plea agreement, acknowledged by the assistant U.S. attorney, in the U.S. District Court for the Western District of Virginia. Within the plea agreement, it states there will be no further prosecution regarding the couple in the Western District of Virginia. The plea agreement is limited to the Western District of Virginia. The plea agreement does not address potential civil tax liabilities or agreements regarding those liabilities. Ms. Szabo and Mr. Martin were each sentenced to 27 months imprisonment and three years of supervised release and paid a joint and several restitution to the U.S. Department of Medical Assistance Services of $173,174.65. They satisfied the judgment.

In separate notices of deficiency to Ms. Szabo and Mr. Martin, dated August 2, 2017, the IRS determined separate liabilities and penalties for each of them regarding tax years 2003 and 2004. The parties timely filed their separate petitions with Tax Court.

Each party filed a separate motion for summary judgment, contending that the plea agreement prevents the IRS from civilly determining, assessing or collecting the deficiencies in income tax or penalties for 2003 and 2004. They also contend that the government did not preserve its rights to pursue the criminal defendants for tax assessments and penalties after the entry of criminal judgment. Even though Mr. Martin’s motion was filed prematurely, the Court determined that it would be refiled anyway so chose to proceed on a substantive basis on his motion.

The Court determined that the plea agreement did not address the civil assessment and collection of taxes and does not bar the IRS from proceeding civilly. The plea agreement does not prevent the IRS from its determination, assessment or collection of tax, penalties, and additions to tax for the years at issue. The Court denied the motions for summary judgment of both petitioners.

Regarding the motions to consolidate, the Court admits the cases have much in common. The Court states the decision for consolidation is best left to the discretion of the trial judge. The Court denied the motions to consolidate without prejudice to the petitioners, allowing them the chance to refile the motions when calendared for trial.

Takeaway: I am not sure whether the petitioners believed their plea agreement would apply to the IRS or United States Tax Court or they were taking a chance on that legal argument, but I would suggest being more familiar with documents like the plea agreement in question before arguing that it is a document controlling for the IRS or the United States Tax Court.

Followup for Ms. March

Docket No. 6161-17 L, Debra L. March v. C.I.R.

I previously wrote about Ms. March regarding Tax Court designated orders here. While the first order there had the issue of how the IRS could reinstate an assessment after potentially being abated, the other order concerned a motion to show cause. Both of the orders this week follow up on that order on the motion to show cause.

Ms. March did not file her tax returns for 2009 and 2010. The IRS audited her for not reporting her income, assessed tax and filed notices of lien against her. She requested a collection due process hearing before IRS Appeals. Appeals issued a notice of determination sustaining the lien filings. Ms. March petitioned Tax Court and the IRS proposed facts and evidence be established as provided in Rule 91(f). They filed a motion for an order to show cause on August 8, 2018. The Tax Court granted the motion by an order on August 10, 2018.

As of this order, Ms. March did not file a response in compliance with the Court’s August 10 order. Instead, she mailed to the Court a document entitled “Amended Petition,” received August 29, 2018. The document does not respond or refer to the proposed stipulation, but alleges defects in how the IRS handled her case.

Since an amended petition cannot be filed as a matter of course, but only by order of the Court in response to a motion for leave in Rule 41(a) (which Ms. March did not file), the Court ordered that it was to be filed as a response to the order to show cause.

The Court orders that the order to show cause is absolute, deeming the facts stipulated regarding her receipt of income and non-filing of the tax returns. She does have the ability to move to be relieved from the deemed stipulations at trial, but would need to present proof of contrary facts.

Her filing stated, “The IRS did not read or address the issues I brought up in my letters about IRS’ failure to issue and mail valid Notices of Deficiency to me.” The Court is unsure whether this statement means that she believes the IRS did not issue valid notices of deficiency or whether she did not receive those notices. As stated above, she would be able to make these arguments at trial but would need to show evidence.

In the Court’s order, it provides that Ms. March is welcome to contact the Chambers Administrator to schedule a telephone conference with the Court and the IRS.

The Court received filings from Ms. March on September 4, 2018, deemed to be a motion for reconsideration of the order above (dated August 31), making absolute the August 10 order to show cause, and a declaration in support of that motion.

Even though Ms. March was a day late in her response, the Court exercised its discretion to treat it as a motion for reconsideration under Rule 161 and addressed its merits. She does not address the issues of her receipt of income or non-filing of returns. Instead, she criticizes how the IRS handled her case and argues that the Tax Court review is limited to the administrative record in a collection due process case (citing Robinette v. Commissioner, an 8th Circuit case).

The Court’s view is that it is not confined to the administrative record in collection due process cases, especially when the case involves a challenge to the underlying liability, pursuant to IRC section 6330(c)(2)(B), resembling a more typical deficiency case. In this instance, the Court of Appeals for the 10th Circuit is the appellate court with jurisdiction (not the 8th Circuit), but the 10th Circuit has not spoken on the issue. Ms. March citied Olenhouse v. Commodity Credit Corp., which is a 10th Circuit case, but it is not a collection due process case, does not relate to tax, and was decided before IRC section 6330 was enacted.

While the Court does not address whether 6330(c)(2)(B) prevents Ms. March from challenging her underlying liability as the IRS states she had a prior “opportunity to dispute such tax liability,” the Court states both parties are permitted to provide evidence outside the administrative record.

As Ms. March did not respond to the proposed stipulations from the IRS, the Court did not vacate the order making the order to show cause absolute and the deemed stipulations still stand.

Additionally, Ms. March explains that she has health problems that would make it difficult for her to appear at trial. She would like the case to be fully stipulated and decided pursuant to Rule 122. She also suggests that the contents of the administrative record be stipulated. The Court does not agree the stipulation should be limited to the administrative record, but encourages the parties to attempt a comprehensive stipulation for the case under Rule 122. That is not an order as the case was not submitted that way yet, but will be addressed if presented that way later. Again, the Court encourages the parties to schedule a telephone conference.

Takeaway: Ms. March has some sophistication as a litigation since she is citing case law. However, her lack of responsiveness to the IRS and the Court do not help her case. Perhaps she was able to address these issues or deal with the stipulations under Rule 122 in time before her September trial date.

More Graev Fallout

Docket Nos. 23621-15 and 23647-15, Nathaniel A. Carter & Stella C. Carter, et al., v. C.I.R., (consolidated cases) available here.

Here are more cases affected by Graev v. Commissioner. The Carters have deficiencies and penalties for 2011 through 2013 while Mr. Evans has deficiencies and penalties for 2011 and 2012.

The Graev decision allowed for Court interpretation of IRC section 6751(b)(1). Specifically, the case held the IRS has a burden of production under section 7491(c) showing compliance with supervisory approval as required under 6751(b). Since the petitioners in these cases would be affected by section 6662 accuracy-related penalties, the IRS filed its motion to reopen the record to admit evidence to establish that the 6751(b)(1) requirements for supervisory approval have been met.

The factors the Court has to examine to determine whether to reopen a record are the timeliness of the motion, the character of the testimony to be offered, the effect of granting the motion, and the reasonableness of the request. The third factor, the effect of granting the motion, is the most relevant.

The IRS seeks to reopen the record to admit declarations of Donald Maclennan, a Supervisory Internal Revenue Agent, and a separate Civil Penalty Approval Form in each case. The petitioners object, stating the exhibits contain inadmissible hearsay. Additionally, one Civil Penalty Approval Form shows a printed date in April 2014, more than a year earlier than Mr. Maclennan’s signature block in May 2015. The two forms call for a signature but show only his printed name. Each of the forms lack justification for his approval.

The Court finds that the forms fall under the exception to the hearsay rule for records of a regularly conducted activity and the declarations fit into evidence that is self-authenticating. The Court admits that the lack of signatures on the forms will go to the weight of the evidence, but are not part of the hearsay evaluation. They show approval by a “Group Manager” and do not explicitly indicate the manager was an “immediate supervisor,” as required under 6751(b)(1). The forms lack evidence of facts necessary for the IRS to meet the required burden. The declarations are meant to bolster the forms but the Court determines that the IRS cannot rely on the declarations for purposes of meeting the burden of production to show the “immediate supervisor” approved the penalty determinations.

Having determined to open the record to allow the IRS to offer evidence that the 6751(b)(1) requirements are satisfied, the Court is allowing the IRS the opportunity to offer admissible evidence or make argument to show the requisite managerial approval. The petitioners have 30 days to conduct discovery regarding whether Mr. Maclennan was Mr. Dickerson’s immediate supervisor (as part of meeting the requirements). The parties may stipulate if they agree by filing a supplemental stipulation of facts. If they do not, either party may move for a supplementary evidentiary hearing to introduce evidence. The IRS may make further argument there are grounds sufficient for the Court to infer Mr. Maclennan’s supervisory status.

The Court grants the IRS motion and received the forms into evidence and the declarations are received into evidence as supporting documents for the forms. The petitioners are ordered to have 30 days to conduct discovery. Either party may move for a supplemental hearing on or before October 9. If neither party requests that hearing, petitioners have until October 19 to notify the court regarding their argument as to Mr. Maclennan’s supervisory role. If notifying the Court, they have until November 9 to file a memorandum of law making that argument.

Takeaway: From my observation, the IRS seemed to be broadly winning the arguments that they met the factors needed to reopen the record to admit evidence in prior cases. In this case, both parties are providing evidence that the Court will evaluate. I think this a balanced approach to weighing the factors regarding reopening the record in a Tax Court case affected by Graev.

 

 

Designated Orders: 8/6/18 to 8/10/18

William Schmidt of the Legal Aid Society of Kansas brings us this week’s designated order post. The case discussed involves a mystery regarding how the IRS made the assessment that led to the filing of the notice of federal tax lien that led to the collection due process case. There may be more orders yet to come in this case. Because the case is scheduled for trial next month in Denver, perhaps Samantha Galvin, another writer of designated order posts and one of the clinicians working in Denver, will have personal knowledge of the case. Keith

For the week of August 6 to 10, there were two designated orders from the Tax Court so this posting will be briefer than usual. It is unclear if this is a week where summer vacations took their toll. Both orders examined are from the same case so the analysis will include all the orders for the week.

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Docket No. 6161-17 L, Debra L. March v. C.I.R.

The Court provided 2 orders in this case starting from IRS Appeals issuing a determination to sustain the filing of the notice of lien for the collection of income tax for tax years 2009 and 2010.

Petitioner had a prior collection due process (CDP) case, Docket No. 10223-14, resulting from a notice of intent to levy. In the prior case the IRS issued a notice of determination sustaining the levy and the petitioner filed a Tax Court petition in which it challenged the validity of the assessment. The parties to that case entered into a stipulated decision on June 25, 2015, that did not sustain Appeals’ determination. The decision document stated that the IRS would abate the liability for tax year 2009 on the basis that the IRS failed to send the statutory notice of deficiency (SNOD) to the petitioner’s last known address. The Court, in the current case, states that it assumes the IRS complied with the decision entered in the prior case and made the abatement.

At issue in this week’s designated order is how the IRS came to have an assessment against the petitioner after the abatement of the prior assessment. The case presents a very curious situation; however, the order does not resolve the mystery but rather seeks to have the parties, particularly the IRS, explain how to resolve it.

At some point after the “presumed abatement” of the 2009 assessment following the first CDP case in Tax Court, the IRS appears to have reassessed the 2009 liability and filed a notice of lien on that 2009 liability. Appeals issued a notice of determination on February 6, 2017. The notice of determination states that the original assessment was abated (due to the wrong address on the notice of deficiency) and the taxpayer was given additional time to file an original tax return. Since the taxpayer continued not to file the return for 2009, the IRS reinstated the assessment. The problem with the verification is that how the IRS reinstated the assessment remains entirely unclear. It seems clear that the taxpayer did not consent to the reassessment by filing a tax return. What remains unclear is what the IRS did to acquire authority to reassess.

The language of the Settlement Officer in the notice of determination contains only a vague statement regarding the basis for the new assessment. For verification, the notice of determination states: “The Settlement Officer verified through transcript analysis that the assessment was properly made per IRC section 6201 for each tax and period listed on the CDP notice.” Ms. March timely petitioned the Tax Court on March 6, 2017 with the new CDP case again contesting the assessed liability.

The Court then analyzes code section 6201. Section 6201(a)(1) authorizes the IRS to assess “taxes…as to which returns…are made” though Ms. March has yet to file a return for 2009. The Court states that the other provisions for making an assessment do not seem to apply beyond the authority for the IRS to determine a deficiency, mail the taxpayer a SNOD, and assess the deficiency upon the passage of 90 days following the mailing (unless the taxpayer files a timely petition with Tax Court). But, the parties stipulated in that prior case that no SNOD was properly mailed, and the notice of determination appears to indicate no SNOD was mailed subsequent to the conclusion of the first Tax Court case.

The Court would like an explanation for the authority the IRS had to “restore the tax assessment.” The Court’s order is for the IRS to file a status report explaining the position about the validity of the 2009 income tax underlying the lien filing at issue in the case.

Takeaway: The IRS looks to have been caught making another bad assessment and then providing an alleged verification that fails to verify the proper statutory procedure for making an assessment. Perhaps they will have a suitable explanation or be able to cite different authority. Either the IRS “reinstated” the assessment without statutory authority for doing so or the Settlement Officer did not know how to write the verification section of the CDP determination and explain a statutory basis for the new assessment. In either case the IRS does not look good but if the IRS simply “reinstated” the assessment as the Settlement Officer describes, it appears the IRS is headed for its second CDP loss with respect to the same taxpayer for the same year for the same problem. Under the circumstances, the IRS attorney might also have noticed this issue before it got in front of a judge a second time. Tough. 

The Court discusses an IRS motion to show cause regarding why proposed facts and evidence should not be accepted as established. This order relates to a routine Rule 91(f) motion requiring a party to stipulate. Because the petitioner is unrepresented, the judge explains in the order how stipulations can be used to include evidence that a self-represented petitioner such as Ms. March would otherwise have to introduce at trial on her own. The judge also explained that Ms. March would not be prevented from introducing additional evidence beyond what was including in the stipulated evidence. The order provides an example of a typical Tax Court order to a pro se taxpayer in which the Court provides a simple, straight-forward explanation of the rules and why the unrepresented individual should comply for their own best interest. While this order uncoupled from Order 1 discussed above would not deserve designated order status, it offers a glimpse of a routine order issued in Tax Court cases to pro se petitioners uncomfortable with the stipulation process for fear of stipulating themselves out of court.

After providing the careful explanation for the benefit of the petitioner, the Court granted the IRS motion to show cause and ordered that the petitioner file a reply on or before August 27. If no response is provided, the Court will issue an order accordingly.

Takeaway: While the Court is reasonable in explaining to an unrepresented petitioner the process of stipulations, the Court also does not stray from the rules or let that delay the upcoming trial (September 24 in Denver).

 

 

Tax Court Jurisdiction and the EITC Ban

We welcome William Schmidt who is normally one of our regular designated order blogging. William’s post today results from a request for help from another designated order blogger, Patrick Thomas, who asked for assistance from his colleagues to do an in-depth analysis on a specific designated order from the week of July 23 to 27. During that week the Tax Court issued a heavy load of designated orders that Patrick turned into a three part series without including the case which is the subject of today’s post. William writes about Docket No. 20967-16, Katrina E. Taylor & Avery Taylor, v. C.I.R. (Order here). He focuses on the Taylor case because it brings back a jurisdictional issue for Tax Court regarding the earned income tax credit (EITC) ban that Les has written about before as is cited below. Keith

To begin with some background on the EITC ban, there have been issues through the years regarding fraud on tax returns claiming the EITC. In response, Congress provided the Taxpayer Relief Act of 1997. Its purpose, according to the Joint Committee on Taxation: “The Congress believed that taxpayers who fraudulently claim the EIC or recklessly or intentionally disregard EIC rules or regulations should be penalized for doing so.” The Act provided for an EITC ban under Internal Revenue Code (IRC) section 32(k). The ban disallows a taxpayer to claim the EITC for 10 years when there claim of the credit was due to fraud (or 2 years for reckless or intentional disregard of rules and regulations, though not due to fraud). There have been issues on how fairly the IRS administers the ban. One example is that it was identified as one of the “Most Serious Problems” in the National Taxpayer Advocate’s 2013 Report to Congress.

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The IRS issued a notice of deficiency to the Taylors regarding the 2013 tax year, listing a deficiency of $14, 186 and an IRC section 6662(a) accuracy-related penalty of $2,837.20. The deficiency results from disallowance of car and truck expenses the Taylors claimed on the Schedule C filed with their Form 1040.

The Taylors timely filed their Tax Court petition and the IRS filed their answer. The IRS followed up with an amended answer, raising two affirmative defenses. First, they raise an IRC section 6663 civil fraud penalty of $10,639.50, asserting the petitioners falsely claimed business-related car and truck expenses to reduce their income to make them eligible to claim the EITC. Second, the IRS raises the 10-year EITC ban pursuant to IRC section 32(k)(1)(B)(I) for improperly claiming the EITC.

To complete the procedural history, the Taylors did not participate further in their Tax Court case, which was to their detriment. They did not respond to the amended answer and the IRS followed with a “Motion for Entry of Order that Undenied Allegations be Deemed Admitted Pursuant to Rule 37(c).” The Court issued an order granting that motion, meaning the Taylors are deemed to have admitted all the statements in the amended answer, including the affirmative allegations with respect to the civil fraud penalty and the 10-year ban on claiming the EITC.

Next, the IRS filed a “Motion to Take Judicial Notice,” which requested the Court take judicial notice of the distances between the Taylors’ home and the various addresses Katrina Taylor reported driving during 2013 for her business activities. The motion asserts that the Taylors’ travel logs are unreliable and overstate the travel distances. The IRS provided Google Maps documents that show the distance and driving times for the routes Mrs. Taylor reported for the business destinations. Since the Taylors did not respond, the Court’s order granted the IRS motion, taking judicial notice of that information as facts, the accuracy of which cannot reasonably be questioned.

The IRS prepared a joint stipulation of facts that the Taylors refused to sign. The IRS filed a “Motion for Order to Show Cause Why Proposed Facts and Evidence Should not be Accepted as Established Pursuant to Rule 91(f).” The Court ordered the Taylors to respond to the motion. Since they failed to respond, the Court issued its order making the Order to Show Cause absolute, meaning the facts and evidence set forth in the proposed stipulation of facts was deemed to be established for the purposes of the case.

Turning to the facts established through the orders, the Taylors reported $105,914 in wages on their 2013 Form 1040, with $55,033 earned by Mrs. Taylor as an employee. The attached Schedule C listed financial data on Mrs. Taylor’s business, which reports no business income. It instead reports advertising expenses of $290 and car and truck expenses of $73,740, resulting in a net loss of $74,030. Also included are a Form 4562, Depreciation and Amortization (Including Information on Listed Property), which states the Taylors represent they used two vehicles for business purposes, with a total of 130,513 business miles. Vehicle 1 was driven 65,212 miles and vehicle 2 was driven 65,301 miles. In response to line 24a, “Do you have evidence to support the business/investment use claimed?” their response was to check the box for “no.” Those business expenses reduced their adjusted gross income to $30,690. Since they had three minor children in 2013, they qualified for an earned income credit of $4,417 based on that income.

The IRS audited the Taylors, focusing on their car and truck expenses. The Taylors supplied two versions of a log purporting to show business miles driven for Mrs. Taylor’s business. The logs were not provided contemporaneously with her travel and state she drove the 130,513 miles on business, driving a 2004 Cadillac truck 41,483 miles and a 2006 BMW 89,030 miles. The Court states these logs are demonstrably unreliable because petitioners traded in the 2004 Cadillac truck with Mrs. Taylor signing an odometer disclosure statement reporting the odometer at time of sale as 102,345 miles while according to the provided logs the December 23, 2013 year end odometer reading was 154,990 miles. Similarly, the BMW’s trade-in odometer disclosure statement was 91,333 miles while the purported logs stated the December 17, 2013, reading to be 186,880 miles.

The Court also believed the log mileage to be inflated. The logs stated Mrs. Taylor drove the Cadillac 1,376 miles and the BMW 701 miles (totaling 2,077 miles) on September 22, 2013. The IRS points out the driving distance from Manhattan to Los Angeles is approximately 2,800 miles and “[a]t a constant speed of 70 miles per hour (“MPH”) it would take 29.7 hours to drive 2,077 miles.” The logs also report trips of 1,200 miles to 1,800 miles for other days.

The Court’s discussion within the order itself focuses on how the petitioners have not been responsive. They failed to plead or otherwise proceed within Rule 123(a). Because of the deemed established facts, the Court grants the IRS Motion for Default Judgment and enters a decision against the Taylors.

In the decision, Judge Jacobs ordered and decided that for 2013 there is a deficiency of $14,186 and an IRC section 6663 civil fraud penalty of $10,639.50 (the IRS sought an IRC section 6662 accuracy-related penalty in the alternative so that is denied as moot). Additionally, Judge Jacobs orders and decides “that the 10-year ban for claiming the earned income credit, pursuant to section 32(k)(1)(B)(I), is imposed as sought in respondent’s amended answer.”

There is no analysis regarding the 10-year ban and whether the Court has jurisdiction to impose it. The closest is a prior mention of the affirmative allegations that “petitioners…should be subject to the 10-year ban on claiming the earned income credit.”

We come back to a jurisdictional issue for the Tax Court. In the Taylor case, the Court had the 2013 tax return at issue. The jurisdictional issue is what authority the Court has with regard to the EITC ban in a case like this. Is the jurisdiction for the year in which the ban arises (2013) or for the years in which the ban will take effect (10 following years, presumably starting with 2014)?

The Tax Court is a court of limited jurisdiction. IRC section 6214(a) states that Tax Court has jurisdiction to redetermine the correct amount of a deficiency at issue. The disallowed refundable credit banned through the EITC ban affects future years that are not before the Tax Court. In fact, IRC section 6214(b) states that the Court “shall have no jurisdiction to determine whether or not the tax for any other year…has been overpaid or underpaid.”

I note that the IRS does have the ability to assert fraud and get facts deemed stipulated in order for the IRS to meet its burden of proof on the issue of fraud. I provide a quote from Console v. Commissioner, T.C. Memo. 2001-32 at *12, aff’d 2003 U.S. App. LEXIS 15535 (3d Cir. 2003): “It is well settled in this Court that the Commissioner may establish fraud by relying upon matters deemed admitted under Rule 90Marshall v. Commissioner, 85 T.C. 267 (1985)Morrison v. Commissioner, 81 T.C. 644, 651 (1983)Doncaster v. Commissioner, 77 T.C. 334, 336 (1981). The Commissioner may also establish fraud by relying on facts deemed to be stipulated under Rule 91(f)Ambroselli v. Commissioner, T.C. Memo 1999-158.” My thanks to Carl Smith for providing this note and citation.

One case to consider is a prior Tax Court case, Ballard v. Commissioner, which included a Tax Court judge’s reluctance to issue an order regarding a 2-year ban on the EITC. Les Book provided prior commentary in Procedurally Taxing here. In that posting, there are links to other posts, including Carl Smith’s discussion of the jurisdictional issue of the EITC ban in the Tax Court. I agree with Les’s view that the Tax Court does not have authority to apply an EITC ban for a year of fraudulent behavior (or reckless/intentional disregard), which could be called a conduct year.

Specifically for the Taylors, I argue that while the petitioners should potentially be subject to the ban, the only year before the Court was 2013. It was within the Court’s authority to find that there was fraud in 2013, but not within their authority to apply an EITC ban for later years.

I am unsure if the Taylors were outmatched in the courtroom. If all of the allegations against them are true, though, I can understand the claims of fraud the IRS made against them. Whether their goal was to inflate business expenses to claim the earned income tax credit or not, the results are unrealistic business miles and mileage logs that do not match. Even if one does not agree with the EITC ban, the ban is an area the IRS has authority to administer. This case does not provide justification that the Tax Court has jurisdiction to administer the EITC ban for later years when 2013 was the conduct year before the Court so went a step too far in ordering the imposition of the EITC ban for the Taylors.