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.

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.

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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.

Issues in Motions to Dismiss for Lack of Jurisdiction: Designated Orders 9/30/19 to 10/4/19

For the work week of September 30 through October 4, there were 4 designated orders.  Three have substantive issues (and all have motions to dismiss for lack of jurisdiction), discussed below.  The first order is a tangled series of notices and petitions that Judge Copeland sorts through.  For the last two orders, Judge Guy deals with two very different cases that both have motions to dismiss for lack of jurisdiction.  In contrasting the two, one involves the definition of a deficiency and the other deals with the classification of a remittance as either a payment or a deposit.

For the fourth order, available here, I wanted to take a brief moment to acknowledge that the Tax Court referred the petitioner to contact local Low Income Taxpayer Clinics to see if they could help.  The clinics are those covering the Tampa, Florida, Tax Court docket (Bay Area Legal Services, Gulfcoast Legal Services, and Florida Rural Legal Services).

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3 Notices and 3 Petitions

Docket No. 4460-17, Tramy T. Van v. C.I.R., Order available here.

To provide some clarity, it will be necessary to include some tables regarding the notices sent by the IRS and petitions filed by Ms. Van (sometimes referred to specifically as Petitioner) and her ex-husband, Denny Chan.

In 2010, Tramy Van and Denny Chan were married.  They filed a joint tax return in 2010 that included a $192,763.00 net operating loss carryforward.  They divorced after 2010 so none of the other tax returns involved are joint returns.

On 11/23/16, the IRS mailed three notices of deficiency.  The first notice was for tax years 2011, 2012, and 2013 (Notice # 1).  That notice was sent only to Petitioner at her last known address and she received it.  It proposed several adjustments, including an adjustment to the carryforward from 2010 to 2011.

Notice # 1 addressed to Petitioner only:

Year Deficiency Section 6663 Penalty Section 6651(a)(1) Addition to Tax
2011 $350,669.00 $263,001.75 $87,167.00
2012 $444,335.00 $333,251.25 None
2013 $550,174.00 $412,630.50 None

The second notice was for tax year 2010 only, sent to both parties at Mr. Chan’s last known address (Notice # 2).  The third notice was also for 2010 and was sent to Petitioner’s last known address, but she did not timely receive it.

Notices # 2 and 3 addressed to Petitioner and Mr. Chan:

Year Deficiency Section 6663 Penalty
2010 $441,539.00 $331,154.25

Petitions Filed by Tramy Van and Denny Chan:

Docket Number Petitioner Notice Attached Filed
2435-17 Denny Chan Notice 2 1/24/17
4460-17 Tramy Van Notice 1 2/21/17
15694-18 Tramy Van Notice 2 8/9/18

As noted above, Denny Chan petitioned the Tax Court, which has led to questions about consolidation of cases.

What we are concerned with, though, is the petition by Tramy Van filed in docket number 4460-17, concerning Notice # 1.  In paragraph five and, importantly, in the attachment to the petition, she explicitly contested “all the IRS’s changes to the tax returns examined for the applicable tax years ending 2010 through 2013 for the following taxpayers:  Tramy T. Van, Tramy Beauty School [Partnership], Tramy Beauty School, Inc. [S Corp].”  She explained that she had not received a notice for 2010, but expected to receive one.

The IRS filed an answer to that petition, alleging no notice was sent to Tramy Van for tax year 2010 (basically denying sending Notice # 2 and # 3).

The next year, Tramy Van filed another petition (15694-18) based solely on tax year 2010, attaching Notice # 2, which was received from Denny Chan’s counsel.

In the 4460-17 case, the IRS filed a Motion for Leave to File Amended Answer, admitting sending the 2010 Notice to Petitioner, with an attachment of Notice # 3, arguing the Court has jurisdiction over 2010.  That same day, they filed a Motion to Consolidate Mr. Chan’s case with the 4460-17 case.  The next day, both motions were granted.

In the 15694-18 case, the IRS filed a Motion to Close on Ground of Duplication, which was later denied.  The IRS later filed a Motion to Dismiss for Lack of Jurisdiction on 1/31/19.  They attached a certified mailing list, showing Notice # 3 was mailed 11/23/16 (this document came nearly two years after the 4460-17 petition).  Since the 15694-18 petition was filed 8/9/18, the IRS motion to dismiss was granted because the petition was untimely, filed eighteen months after the 90-day period for filing the petition expired.

Turning to the analysis in this case, the 2010 notice was deemed received by Petitioner in the 15694-18 case when sent to her last known address on 11/23/16, treating Notice # 3 as a valid notice of deficiency.

Next, since Notice # 3 was sent by certified mail on 11/23/16, a petition would be timely if postmarked on or before 2/21/17.  The 4460-17 petition was filed 2/21/17, within the statutory 90-day period, making it a timely filed petition.

Is there an objective indication Tramy Van contested the 2010 determination?  In order to do so, a taxpayer must give an objective indication of contesting a deficiency determined by the IRS against the taxpayer.  The petition must be ascertainable about the issues presented and give the parties and the Court fair notice of the matters in controversy and the basis for their respective positions.

The petition states that Tramy Van contests all changes to her 2010 return concerning her as an individual and regarding her two businesses.  She states she was not in actual receipt of the notice, which is why it was not attached.  She was in receipt of Notice # 1, which has a connection from 2011 to the disallowed net operating loss carryforward disallowed from 2010.  By stating she contested the changes for years 2010 through 2013, she gave notice to the Court and the IRS that 2010 would be a matter in controversy within the petition.

The Court denied the IRS motion to dismiss for lack of jurisdiction for Tramy Van as to tax year 2010.  All other arguments raised by the parties were deemed either moot or without merit.

Takeaway:  The multiple notices and petitions have led to a good amount of confusion that needed sorting out.  It is fortunate for Tramy Van that she listed the year 2010 on her petition, plus mailed the petition in a timely fashion, or it likely would have been dismissed before the Tax Court.

What Is a Deficiency?

Docket No. 5307-19S, Rajan R. Kamath v. C.I.R., Order of Dismissal for Lack of Jurisdiction available here.

Mr. Kamath did not timely file his federal tax returns for tax years 2011, 2012, 2013 and 2015.  The IRS audited him and prepared substitute tax returns under section 6020(b) and mailed 30-day letters regarding the income tax deficiencies for the years at issue.  Mr. Kamath filed delinquent tax returns for those years, leading the IRS to process the tax returns, resulting in tax liabilities and additions to tax under sections 6201(a)(1) and 6651(a)(2).

The IRS issued a notice of deficiency for the four tax years.  There were no deficiencies in federal income tax listed, but they determined Mr. Kamath to be liable for the following additions to tax based on his delinquent tax returns:  section 6651(a)(1) [late filing] for all four tax years, section 6651(a)(2) [late payment] for tax years 2013 and 2015, section 6654 [failure to pay estimated tax] for tax years 2012, 2013, and 2015.  Mr. Kamath timely filed a petition for redetermination challenging the notice of deficiency.

In the analysis, section 6212(a) authorizes the IRS to send notices of deficiency to taxpayers.  The question is – did the IRS determine a “deficiency” within the meaning of the Code?  Section 6211(a) defines a “deficiency” as the amount by which the tax imposed by subtitle A and B, or chapters 41 to 44 of the Code, exceeds the excess of the sum of the amount shown as the tax by a taxpayer on the taxpayer’s return plus the amounts previously assessed as a deficiency, over the amount of rebates made.  Section 6665(a) states the general rule that additions to tax are treated as “tax” for purposes of assessment and collection.  Section 6665(b) provides an exception to the general rule, however, that subsection (a) shall not apply to additions of tax under sections 6651, 6654, or 6655, except for applications of 6651 additions, to the extent such addition is attributable to a deficiency in tax under section 6211, or additions described in section 6654 or 6655, if no return is filed for the taxable year.

Mr. Kamath filed delinquent federal income tax returns for the four years that the IRS assessed under 6201(a)(1).  In the Court’s review, the tax liabilities reported do not constitute income tax deficiencies under 6211(a).  Also under 6665(b), the additions to tax are not “tax” subject to the Court’s jurisdiction.  The additions to tax under 6654 are also not subject to the deficiency procedures because Mr. Kamath filed delinquent tax returns for the years in issue.  It followed that the notice of deficiency is invalid and the Tax Court is obliged to grant the IRS motion to dismiss.

The Court has some sympathy to the petitioner’s argument that it is inequitable to deny him the opportunity to petition the Tax Court.  As they have said previously, “We recognize the difficult position in which petitioners are placed by not being able to come to the Tax Court to test the validity of the respondent’s action in asserting the penalty.  Nevertheless, that is the law and we must take it as we find it.”

The Court ordered that the IRS motion to dismiss for lack of jurisdiction is granted and dismissed the case for lack of jurisdiction on the ground that the notice of deficiency is invalid.

Takeaway:  Mr. Kamath’s delinquent filing of his tax returns led to greater issues with the IRS than if he had timely filed his tax returns.  If he had not filed those tax returns late, all of the penalties would have been on the statutory notice of deficiency the IRS would have been required to send in order to assess the taxes and he could have contested them in Tax Court.  By filing the late returns, Mr. Kamath cut off his ability to contest the penalties in a pre-payment forum.  The lesson here is that a taxpayer who doesn’t file his return and now wants to contest the late filing and late payment penalties that will necessarily follow should not agree with the IRS when it proposes an IRC 6020(b) return but should instead wait for the notice of deficiency which will give him the opportunity to put on information about the tax itself and probably settle it at the same place he would have been had he filed the late returns while preserving his pre-payment right to go to Tax Court to contest the penalties.  Unless he has very unusual facts the preservation of the pre-payment right to contest the penalties may not be of much value.

Is It a Payment or a Deposit?

Docket No. 25757-18S, Albert Carnesale & Robin Carnesale v. C.I.R., Order available here.

Before we dig into the issue of deposits versus payments, I am going to provide some citations where you can read more on the subject.  One prior post in Procedurally Taxing is available here.  You can also turn to the Saltzman and Book text in ¶6.06 Advance Remittances: Deposits vs. Payments.

Originally, the IRS mailed to the petitioners a CP2000 notice, stating that they owed additional tax of $23,171 for tax year 2016, an accuracy-related penalty under IRC section 6662(a) of $4,220, and interest of $1,120, offset by a credit of $2,070.  In response, the accountant for the Carnesales sent a letter to the IRS with a check for the tax liability.  The letter stated that they agreed with the changes in tax liabilities, but requested a waiver of the tax penalty.

The IRS followed up with a notice of deficiency with the same amounts for the tax liability and accuracy-related penalty.  The Carnesales filed their petition with the Tax Court, stating that they do not contest the underlying liability but do contest the penalty.  The IRS filed a motion to dismiss for lack of jurisdiction on the ground the notice of deficiency is invalid because the Carnesales paid the tax liability before the notice of deficiency was issued to them.

The IRS argues that the remittance should be treated as a payment of tax instead of a deposit because the Carnesales failed to follow the procedures in Rev. Proc. 2005-18, 2005-1 C.B. 798, to properly designate the remittance as a deposit.

In the transcript for 2016 submitted by the IRS, the remittance is recorded as “Advance payment of tax owed”.  No assessments were entered for the tax, penalty, or interest proposed in the CP2000, leaving a credit balance in the account for the Carnesales.

Contrary to the procedures established in Rev. Proc. 2005-18, the remittance was not offset by a corresponding assessment of tax to which the “payment” relates.  The Court concludes that the IRS treated the remittances as a deposit, not a payment, and did not assess additional tax equal to the amount of the remittance before issuing the notice of deficiency.

The Court dismissed the motion to dismiss for lack of jurisdiction.  Trial is currently scheduled for January 13 in Los Angeles.

Takeaway:  While there are procedures for designating a remittance as a deposit in Rev. Proc. 20015-18, it looks like the petitioners were fortunate in how the IRS treated the remittance so the case was not dismissed for lack of jurisdiction and they can be heard at their day in court.

The Collection Due Process Summit Initiative – 2019 Low Income Taxpayer Representation Workshop

I am here to provide an update of the Collection Due Process (CDP) Summit Initiative, which Carolyn Lee first wrote about in this post. Some of you may be aware that the American Bar Association holds a Low Income Taxpayer Representation Workshop each December in Washington, D.C. For 2019, the focus is on the Collection Due Process Summit Initiative. Anyone interested in Collection Due Process is welcome to attend. Registration is only $20 for ABA members, and $30 for nonmembers.

The meeting will be held December 3 from 8:30 to noon at Morgan, Lewis & Bockius LLP. More details are below.

The Collection Due Process Summit Initiative

The origin for the Collection Due Process Summit Initiative came about when preparing for a panel presentation for the 2019 May Tax Meeting for the American Bar Association Section of Taxation meeting in Washington, D.C. The panelists were Keith Fogg, Judge Gustafson, Mitch Hyman, Carolyn Lee, Erin Stearns and myself. Within the panel, we made a point of discussing issues with CDP to avoid complaining and with the goal of brainstorming creative ways for positive change. We also wanted to look at several areas related to CDP – the CDP notices mailed out by the IRS, the meetings with Appeals, the Tax Court process, and whether a creative solution like mediation would apply.

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Following the panel, several members of the group kept in touch. We worked to develop a core group of people to steer the Summit Initiative. With that steering committee, we discussed a set of roughly 30 issues with CDP. We took that input and people’s votes for what would be popular. We also wanted input from within the IRS of what sounded realistic. If something would not work, why not? We took the input on those 30 issues, divided into stages, and selected the top 3 to 4 for each.

It must be noted that the steering committee includes private practitioners, educators, IRS Chief Counsel, the Taxpayer Advocate Service, and LITC directors. We also have people within IRS Appeals, IRS Collections, and the Tax Court that we stay in communication with and use as sounding boards regarding their stages of CDP.

Members of the steering committee also wanted to provide further education on the CDP process. At the 2019 Fall Tax Meeting for the American Bar Association Section of Taxation meeting in San Francisco, there were 3 panels developed by the CDP Summit Initiative connected to the CDP process. The first panel, for the Young Lawyers Forum and Diversity committees, was part of the Tax Bridge on the Road, titled “What is Collection Due Process? A Practical Introduction to the Stages of CDP.” The second, for the Individual & Family Taxation committee, was called “Collection Due Process Notices: Much Needed Works in Progress.” The third panel, for the Pro Bono & Tax Clinics committee, was called “Prior Opportunities to Dispute Liability in Collection Due Process: An Oversized Reaction to Insufficient Action.”

The Workshop

While it is a goal of the CDP to promote education regarding CDP, we also want to bring discussion for change. The day will start out with some history of CDP and the Summit Initiative. From there, we turn to a panel on how to approach change with the IRS to achieve the best results. Next, we turn to breakout sessions regarding the top opportunities cited at the various stages of the CDP process. We will bring the group together to share what each group learned before turning to Keith Fogg for closing comments. We will be using the results to guide working groups next year to tackle those top opportunities at each stage.

All who are interested in CDP improvement are invited – from the private bar, Enrolled Agents, CPAs, and those attending the LITC conference that week. As you can see, Keith and others from the Procedurally Taxing website are involved with the CDP Summit Initiative. The cost is low so should not keep any of you in the area from attending – especially as it will include 2 MCLE credits and a box lunch!

2019 Low Income Taxpayer Representative Symposium
Collection Due Process Summit Initiative Workshop

December 3, 2019
8:30 a.m. – Noon

Improving Procedures for Taxpayers to Arrange
Sustainable Plans to Collect the Correct Amount of Tax Owed.

Who should attend?  Everyone interested in the efficient, effective collection of tax, via procedures that are humane for taxpayers, including the IRS (Collection, Appeals, Counsel), taxpayer representatives and the Tax Court
Date: Tuesday, December 3, 2019
Time: 8:30 a.m. – Noon (box lunches to grab and go)
Location: Morgan, Lewis & Bockius LLP
1111 Pennsylvania Avenue, NW
Washington, DC 20004
Registration Fee:  $30 General Registration
$20 ABA Member
$20 Full-time LITC Employee
Free Full-time J.D., LL.M., or M.T. Candidates (No CLE Credit)
[Law Student registrants who are current nonmembers will also receive complimentary Membership in the ABA and the Section of Taxation]

AGENDA

8:30 a.m.

Opportunities for CDP Improvement: Efforts Underway by the Collection Due Process Summit Initiative.
Collection Due Process (CDP) is a bundle of IRS collection procedural protections governed by IRC section 6320 and 6330, that affect taxpayers, their representatives, the IRS, and the Tax Court. CDP provides a structured path to achieving sustainable tax collection alternatives of procedural value to taxpayers and IRS Collection professionals. However, over time, CDP as applied lapsed into policies and procedures that often inhibit a broad range of individual and business taxpayers from establishing collection alternatives to full payment of the correct tax owed, which taxpayers can maintain. In addition, CDP procedures as applied frequently create frustration for IRS Collection professionals and IRS Counsel attorneys. These developments are contrary to the express beneficial intent of the Section 6320/6330 legislation and imperil efforts to efficiently arrange sustainable methods for taxpayers to pay the correct amount of tax owed.

Change for the better is in the air, in the form of the CDP Summit Initiative established in May 2019 to support CDP and improve how it works. Summiteers include representatives of all stakeholders, as direct participants or advisory resources. Following a methodical, consensus-driven process, the Summit Steering Committee identified priority opportunities with high potential to increase the beneficial impact of CDP in application. Summit Working groups formed around the priority opportunities are in the early stages of determining objectives, strategies and tactics to result in change.

This session will update LITR participants about Summit-designated opportunities to improve CDP, why the opportunities were selected for further exploration and action, and how all stakeholders interested in the effective and efficient arrangement of reasonable collection alternatives will benefit from the Summit’s collaborative work.

The CDP Summit’s work has the support of several ABA Tax Section committees including the Pro Bono & Tax Clinic Committee and the Individual Tax and Family Committee. ABA tax meetings have provided an important platform to discuss CDP issues and solutions while educating conference participants about functioning effectively within CDP boundaries.
Moderator: Sarah Lora, Low Income Tax Clinic, Lewis & Clark Law School, Portland, OR
Panelists: Mitchel Hyman, IRS Office of Chief Counsel, Washington, D.C.; William Schmidt, Kansas Legal Services, Kansas City, KS; Erin Stearns, Low Income Taxpayer Clinic, University of Denver, Denver, CO

9:15 a.m.

Approaching Change With the IRS
This panel will identify and explain constructive ways for practitioners to work with the IRS to create positive change benefiting both the IRS and taxpayers in the area of CDP and beyond. Panelists will explore various levels of rulemaking, the scope and authority of those rules, and ways to influence those rules. The panel also will discuss tools practitioners may use to explore and understand the underpinnings of regulatory actions, such as the Freedom of Information Act, as well as effective opportunities for proposing regulatory reform. The panel will also discuss the role of the Taxpayer Advocate Service’s Systemic Advocacy Management System (SAMS) in identifying the need for systemic changes and implementing those changes.
Moderator: Matthew James, Low Income Tax Clinic, North Carolina Central University, Durham, NC
Panelists: Mary Gillum, Legal Aid Society of Middle Tennessee & the Cumberlands, Oak Ridge, TN; John B. Snyder, III, Low-Income Taxpayer Clinic, University of Baltimore, Baltimore, MD; James P. Leith, Local Taxpayer Advocate, Baltimore, MD

10:00 a.m. Break

10:15 a.m. Exploring CDP Challenges and Practical Solutions – Working Breakout Sessions
Session participants will actively explore CDP policy and procedures focusing on CDP Summit priority opportunities and potential feasible solutions. Output will further the work of Summit Working Groups to effect change and increase efficient, fair tax collection.

Workshop participants choose to attend one of three concurrent sessions:

(1) Improving IRS CDP Notices and Communications. This program will educate participants about IRS communication approaches as they pertain to CDP rights and procedures and known issues with the communications. The session leaders will facilitate an exchange of ideas for more effective messaging to increase taxpayer participation in CDP and more effective engagement with Collections at the earliest possible stage.
Facilitators: William Schmidt, Kansas Legal Services, Kansas City, KS; Jeff Wilson, Taxpayer Advocate Service, Indianapolis, IN; Beverly Winstead, Low Income Taxpayer Clinic, University of Maryland, Baltimore, MD

(2) Improving CDP Administrative Proceedings. Participants will learn about opportunities for more effective engagement with IRS Appeals, including when a taxpayer may challenge the accuracy of an assessed liability, the critical role of a record in establishing a sustainable collection alternative to immediate full payment, and procedural traps for the unwary. Participants will collaborate to identify improvements yielding more efficient and effective application of CDP through constructive interaction between taxpayers (or their representatives) and Appeals.
Facilitators: Soreé Finley, Charlotte Center for Legal Advocacy, Charlotte, NC; Susan Morgenstern, Local Taxpayer Advocate, Cleveland, OH; Erin Stearns, Low Income Taxpayer Clinic, University of Denver Sturm College of Law, Denver, CO

(3) Exploring CDP rights and procedures within judicial proceedings. Focused on improving effectiveness and efficiency for all participants in Tax Court matters, this session will analyze common petitioner and respondent approaches to litigating CDP in Tax Court. The session will explore opportunities to increase the number of taxpayers who exit litigation with a sustainable plan to collect the correct amount of tax due. Participants will discuss the Court’s authority and limits to achieving a result satisfactorily resolving the issues between the parties; typically, a collection solution for taxpayers litigating in good faith.
Facilitators: Keith Fogg, Federal Tax Clinic, Harvard Law School, Jamaica Plain, MA; Christine Speidel, Villanova University Charles Widger School of Law, Villanova, PA

11:15 a.m. Discussion of Breakout Session Results and Identification of Next Steps
Breakout session leaders will report on results of the group discussions, focusing on pragmatic elements for IRS procedural change, practitioner performance improvement and taxpayer orderly, effective interaction with CDP. Essentially a collaborative CLE, educating the participants on best practices in applying CDP, the output will inform the strategic and educational work for the Collection Due Process Summit Initiative during 2020. Proposals will address, among other topics, an analysis of IRS CDP correspondence, taxpayer rights in Appeals, and the role of judicial review in guiding sustainable collection alternatives. This session will emphasize sharing taxpayer representative practice tips and easy-to-implement internal IRS process improvements.
Facilitators: Susan Morgenstern, Local Taxpayer Advocate, Cleveland, OH; William Schmidt, Kansas Legal Services, Kansas City, KS; Christine Speidel, Villanova University Charles Widger School of Law, Villanova, PA; Erin Stearns, University of Denver Sturm College of Law, Denver, CO

11:55 a.m. Closing remarks. Addressing the importance of critical analysis of CDP as applied and vigilant efforts to support the proper application of CDP, in order to achieve the beneficial intent of IRC Sections 6320 and 6330.
Presenter: Keith Fogg, Federal Tax Clinic, Harvard Law School, Jamaica Plain, MA

Noon Workshop adjourns. Box lunches to grab and go.

Tax Protesting and 6673 Penalties: Designated Orders 9/2/19 to 9/6/19

There was one sole designated order for the week I monitored the Tax Court in September. It deals with a tax protestor who is a frequent flier with the Tax Court. How did he fare? Find out below. Following that, we provide a survey of section 6673 penalty cases in the Tax Court.

Tax Protesting
Docket No. 17872-18L, Alexander H. Hyatt v. C.I.R., Order and Decision available here.

The petition filed concerns a notice of determination sustaining a proposed levy to collect on unpaid tax liability for 2012. The IRS filed a motion for summary judgment with a declaration in support. The Court ordered Mr. Hyatt to file a response to the motion on the same day. In the Court’s order, they cautioned Mr. Hyatt that his frivolous arguments raised in the petition could be subject to the imposition of a section 6673 penalty of up to $25,000.

Previously, Mr. Hyatt had filed a petition with the Tax Court concerning the notice of deficiency of $39,414 on the 2012 tax year. He filed an imperfect petition and the Court ordered him to file an amended petition and pay the filing fee. Since he failed to do that, the petition was dismissed for lack of jurisdiction.

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In response to a notice of intent to levy the unpaid 2012 tax liability, Mr. Hyatt filed for a collection due process hearing. However, his arguments were that no contract exists between the parties, the tax was fraudulently assessed, he objects to the United States financial system, objects to his status as a citizen of the United States, objects to the Social Security system, and desires to rescind his signature on all IRS Forms 1040 he filed because he believes he is no longer legally required to file such forms.

In the collection due process hearing, the settlement officer verified that all procedural and administrative requirements were met. Mr. Hyatt could not challenge the underlying tax liability because of his previous failed petition to the Tax Court. He informed the settlement officer he was not seeking a collection alternative. The settlement officer determined that the proposed levy was appropriate and the IRS issued the notice of determination.

With the current petition, Mr. Hyatt asserts there is no legal authority (statutory, regulatory, or otherwise) that authorizes the notice of deficiency, the IRS fraudulently manipulated its internal systems, and no regulation imposes a tax liability on wages. He also made the other arguments listed above. He did not respond to the IRS motion for summary judgment.

As an aside, I recommend reading (or skimming) the IRS statements regarding tax protesters. The official title is “The Truth About Frivolous Tax Arguments”, available starting here, or in a 73-page PDF here. It is fascinating reading into the world of tax protests. Truly, this group has come up with creative arguments regarding why the federal tax system does not apply to them and why they should not pay their share of taxes.

The official IRS position is that these are frivolous tax arguments. Accordingly, those frivolous tax arguments can lead to hefty penalties. By the way, that sentence is what is known as foreshadowing.

Back to the Tax Court – the Court analyzes the collection due process hearing. Looking at the facts above concerning the settlement officer’s actions, the Court finds there was no abuse of discretion for sustaining the proposed levy.

The Court reviewed Mr. Hyatt’s arguments and concludes they are frivolous and without any basis in law or fact. As a result, the Court determines that summary judgment is appropriate and grants the IRS motion.

Finally, the Court reviews the authority to impose a penalty not exceeding $25,000 under IRC section 6673(a)(1). Now, until this point, I was thinking that this was an average tax protestor case and it would not necessarily be worth reporting on.

However, Mr. Hyatt is a repeat offender at the Tax Court. You can see how each judge leaves hints for the next judge regarding future treatment of such an offender:

• In docket # 7221-07L, the Tax Court imposed a $5,000 penalty – Judge Kroupa first states, “Petitioner deserves a penalty under section 6673(a)(1), and that penalty should be substantial, if it is to have the desired deterrent effect.” Later, “We are also convinced that petitioner is aware of the warnings this Court has given to taxpayers who provide the type of arguments petitioner provided in this case yet petitioner persisted and wasted this Court’s limited time and resources.” After applying the penalty – “In addition, we take this opportunity to admonish petitioner that the Court will consider imposing a larger penalty if petitioner returns to the Court and advances similar arguments in the future.”

• In docket # 26157-08, a $7,500 penalty – From the bench opinion transcript of the hearing (where Mr. Hyatt did not appear) with Special Trial Judge Armen: “The record in this case convinces us that petitioner was not interested in disputing the merits of the deficiency in income tax determined by respondent in the notice of deficiency. Rather, the record demonstrates that petitioner regards this case as a vehicle to protest the tax laws of this country and espouse his own misguided views. We are also convinced that petitioner instituted and maintained this proceeding primarily, if not exclusively, for purposes of delay. Having to deal with this matter wasted the Court’s time, as well as respondent’s. Moveover, taxpayers with genuine controversies may have been delayed. Many years ago, Supreme Court Justice Oliver Wendell Holmes said: ‘Taxes are what we pay for civilized society.’ Petitioner undoubtedly feels himself to be entitled to every benefit that civilized society has to offer; unfortunately, he feels no obligation to pay his fair share. [Regarding the previous penalty,] Petitioner remains undeterred.”

• In docket # 8771-08L, a $10,000 penalty – Mr. Hyatt is before Special Trial Judge Armen again, this time appearing with the same Respondent’s counsel from the last case. Judge Armen reuses a good amount of the language above in another bench opinion transcript. “In view of the foregoing, and as Petitioner remains undeterred, he deserves a significant penalty under section 6673(a). Accordingly, we shall grant that part of Respondent’s motion requesting a sanction and impose a penalty on Petitioner in the amount of $10,000.”

• In docket # 22711-09L, a maximum penalty of $25,000 – This time, it is a bench opinion transcript from a trial before Judge Halpern. “We are convinced that Petitioner has no legitimate grounds for challenging the notice. Rather, Petitioner’s arguments in this case and Petitioner’s previous appearances before this Court demonstrate that Petitioner regards this case as a vehicle to protest the tax laws of this country and espouse his own misguided views. Based on well-established law, Petitioner’s position is frivolous and groundless. We are also convinced that Petitioner instituted and maintained this proceeding primarily, if not exclusively, for purposes of delay. Having to deal with this matter wasted the Court’s tie, as well as Respondent’s.” Regarding the prior penalties – “Petitioner has not been deterred, and we think it appropriate to penalize him to the maximum extent possible. We therefore shall impose on him a 6673(a)(1) penalty of $25,000.”

In this case, the Court states that Mr. Hyatt has not been deterred from maintaining frivolous positions. He advanced frivolous arguments that serve no purpose other than to protest the tax system and delay the collection of his owed taxes, wasting resources of the Court and the IRS. Because of those reasons, the Court again imposed the maximum penalty of $25,000.

Takeaway: See a pattern? Tax protesting is not profitable in Tax Court. I do not advise it. Find better creative outlets than upsetting the Tax Court.

We may never know how many fees the IRS collects from Mr. Hyatt. Keith mentioned that it would be an interesting CDP case in Tax Court regarding the collection of 6673 fines.

§ 6673 Penalty Tax Court Cases

Keith thought it would be worthwhile to survey 6673 penalty cases with the Tax Court using the order function on the website. It is possible that some 6673 cases were decided by opinion and not by order so this list may not be all inclusive. Keith asked his research assistant to run a search using the order function which is one of the best features of the Court’s website. Here, we have a list of the 6673 penalties imposed by judges during years 2011 through 2019. There were 173 penalties imposed during this period. Keith is using the information to write an article in a forthcoming edition of the Journal of Tax Practice and Procedure. Look for more details in that article and a breakdown of penalties imposed by year.

Cases by Judge:
– Judge Armen: 6 cases
– Judge Buch: 2 cases
– Judge Carluzzo: 32 cases
– Judge Colvin: 2 cases
– Judge Copeland: 1 case
– Judge Foley: 58 cases
– Judge Gale: 1 case
– Judge Gustafson: 8 cases
– Judge Guy: 10 cases
– Judge Halpern: 2 cases
– Judge Holmes: 2 cases
– Judge Kerrigan: 1 case
– Judge Leyden: 2 cases
– Judge Marvel: 8 cases
– Judge Morrison: 4 cases
– Judge Nega: 11 cases
– Judge Panuthos: 3 cases
– Judge Paris: 4 cases
– Judge Pugh: 4 cases
– Judge Ruwe: 1 case
– Judge Thornton: 10 cases
– Judge Wherry: 1 case

My main comments are that Judges Carluzzo and Foley are the top two judges with 6673 penalty cases. However, Judge Carluzzo stopped after 2016. Chief Judge Foley picked up the slack in 2018. As Chief Judge, he is setting a new standard for the imposition of this penalty. It’s possible we are seeing a shift in the approach of the court to imposing the penalty but it’s also interesting to note how many Tax Court judges have never imposed the 6673 penalty.

Innocent Spouse, Abuse of Discretion, and Remand: Designated Orders 8/5/19 to 8/9/19

My August week of designated orders brought four orders in different areas. The topic range includes innocent spouse (with the question of application under the Taxpayer First Act), collection due process and remands. One of the remands has an abuse of discretion issue.

Taxpayer First Act and Innocent Spouse
Docket No. 12498-16, Beverly Robinson v. C.I.R., Order available here.
In her first designated order, Judge Copeland brings up how the Taxpayer First Act affects a pending innocent spouse case. Carlton Smith blogged about this issue in Procedurally Taxing previously here. Carlton’s article discusses the implications of the Taxpayer First Act section concerning innocent spouse cases, specifically IRC section 6015(f) cases.

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This order concerns a case that already went to trial on February 5, 2018. The parties filed a joint stipulation of facts and a joint first supplemental stipulation of facts. The petitioner moved to admit Exhibit 58-P and it was admitted into evidence. Each party called witnesses in support of their arguments. The entire administrative record was not presented or received into evidence. The trial was before Judge Chiechi, who has since retired. The case was reassigned to Judge Copeland. After trial, on July 1, 2019, the Taxpayer First Act was signed into law. The relevant portion to this case is below.

Section 1203(a)(1) of the Taxpayer First Act of 2019 (TFA) amended IRC section 6015(e) to add a new paragraph (7):

(7) STANDARD AND SCOPE OF REVIEW. — Any review of a determination made under this section shall be reviewed de novo by the Tax Court and shall be based upon —
(A) the administrative record established at the time of the determination, and
(B) any additional newly discovered or previously unavailable evidence.

TFA section 1203(b) states those sections apply to “petitions or requests filed or pending on or after the date of the enactment of this Act.”

Judge Copeland issued this order, stating that the parties shall file a response to the order addressing the effect of sections 1203(a) and (b) of the TFA on this case.

At first, I thought the judge wanted the parties to do research on the TFA and how its innocent spouse provision applied in general to their case so I would have directed them to Carlton’s article. However, I reread the order and realized just what she meant concerning the TFA’s application to their case.

The case was pending on the date the TFA was enacted. Now, normally the Tax Court would review the innocent spouse determination de novo based upon (A) and (B) listed above. However, the administrative record was not introduced or received into evidence, which is part of subsection (A) above. What to do in this case? Let the parties make their arguments about the matter. Thus, the judge ordered the parties to submit their responses on or before September 4, 2019.

As a follow-up – on August 30, the IRS filed an unopposed motion for an extension of time. That motion was granted to give the IRS an extension of time to October 4.

Takeaway: Applying the Taxpayer First Act will open up several questions for years to come. Since the Taxpayer First Act specifically discusses Tax Court review of innocent spouse cases, this may be a prominent issue moving forward in designated orders. They should still read Carlton’s article.

More Innocent Spouse
Docket No. 10341-18, Jeffrey C. Elliott v. C.I.R., Order available here.
Pamela Elliott filed a motion for leave to file a notice of intervention in this innocent spouse case. Normally, she could have intervened as a matter of right. However, she filed the motion after the 60-day window during which she could intervene and requests leave to do so at this late time. Her reasoning is that “she was not represented by counsel and did not understand her procedural rights,” adding that the “interests of justice favor allowing her request.”

The Court reviews factors regarding Ms. Elliott’s motion for leave to file a notice of intervention. The first factor is the length of time she knew or should have known of her interest. Ms. Elliott waited a year so that factor weighs against her. The second factor is the prejudice the parties may suffer by her failure to intervene earlier. Mr. Elliott did not provide proof of additional fees he would suffer, the docket in this case has been inactive, and the parties have sufficient time to prepare for an October 2019 trial so it is determined that the parties will not suffer prejudice from her failure to intervene earlier so that factor weighed in her favor. The third factor is the prejudice she will suffer from a denial of her motion. Because she will be affected by the decision on innocent spouse relief, she would suffer prejudice by not being able to participate in the trial and that factor weighs in favor of granting the motion. The fourth and final factor is any unusual factors weighing in favor of finding timeliness. There are no issues affecting timeliness, but the parties are involved in another Tax Court proceeding (2957-19) involving similar issues. On balance, the factors allow for Ms. Elliott to be granted the relief she sought.

The Court grants her motion for leave to file a notice of intervention, ordering to amend the caption and serve her with the proper notice and pretrial order so she may prepare for trial.

Takeaway: It is not recommended to file documents after a deadline has passed. However, factors may allow for the Court to grant an individual the relief sought.

Abuse of Discretion for Installment Agreement Notice
Docket No. 2018-17L, Don R. Means v. C.I.R., Order here.
The petitioner is a retired airline pilot who claimed deductions based on participation in tax shelter programs. Audits of those schemes resulted in the IRS disallowing the deductions and deficiencies for 7 tax years. The Tax Court entered final judgments in 2013 regarding the aggregated assessed tax and associated accrued interest to be, respectively, $102,765 and $76,498. Mr. Means entered into a $500 monthly installment agreement in February 2014. The IRS terminated the agreement in May 2016. In July 2016, the IRS issued a Notice of Intent to Levy. Mr. Means filed a Form 12153 to request a Collection Due Process hearing. In the form and also by request to the settlement officer, Mr. Means requested an explanation of the termination of the installment agreement.

Termination of an installment agreement must be preceded by a 30-day notice that provides an explanation to the taxpayer. There were inconsistencies in the administrative record so it was unclear that the notice requirement under IRC section 6159(b)(5) was met or that such notice was provided to Mr. Means (though there is an indication that Mr. Means, his ex-wife, or both, failed to provide the IRS updated financial information, which led to the termination).

The Court cannot agree with the settlement officer’s determination that legal and administrative procedures were met. Therefore, the conclusion is that the determination sustaining the proposed levy was an abuse of discretion. The Court remands the case to Appeals for a supplemental hearing. On remand, if Mr. Means did not have proper notice, he should either be allowed to continue the installment agreement or receive the proper notice due, with the right to appeal.

Takeaway: Consistent procedure is necessary for the IRS so that a taxpayer receives proper due process. If the administrative record is inconsistent about notices, it is more likely for the Court to decide there was abuse of discretion.

Collection Due Process, Remand, and Summary Judgment
Docket No. 25904-16SL, Chinyere Egbe & Sheila Daniels Egbe v. C.I.R., Order and Decision available here.
To begin, petitioners received an IRS notice of deficiency for tax years 2012 and 2013. They did not petition the Tax Court based on that notice.

Next, the IRS issued to the petitioners a Final Notice of Intent to Levy and Notice of Your Right to Hearing for the 2013 tax year. The petitioners submitted a form 12153 to request a collection due process (CDP) hearing.

The settlement officer assigned to the case worked with the petitioners and their representative. The officer granted them an extension of time and did not receive any requested financial documents. However, he told their representative that they qualified for a streamlined installment agreement of $275 per month. The representative agreed to get back with the settlement officer after discussing with the petitioners. The petitioners made two payments before realizing the agreement was not in effect and then terminated their relationship with the representative because of not communicating acceptance of the installment agreement to the IRS.

The IRS issued a notice of determination to the petitioners not to grant relief from the proposed levy action. The petitioners filed a timely petition to the Tax Court concerning the notice of determination, also checking the box for a notice of determination concerning innocent spouse relief (which did not apply) and indicating the notice was for tax years 2012 and 2013 (when it was only for 2013).

The IRS filed a motion for summary judgment, which the Court denied. The Tax Court remanded the case to IRS Appeals for a further administrative hearing so the IRS could provide petitioners a supplemental CDP hearing. The Court dismissed tax year 2012 and the innocent spouse claim from the case.

The same settlement officer held a further CDP hearing. He informed the petitioners they could not challenge the liability for tax year 2013 because they received a valid notice of deficiency and that they had accrued an additional liability. The settlement officer proposed an increased installment agreement and they accepted, signing form 433D.

The IRS issued to the petitioners a supplemental notice of determination related to tax year 2013, determining that the proposed levy is not sustained because they agreed to a $600 per month installment agreement.

Following the supplemental notice of determination, both parties were to file status reports but only the IRS filed one. The Court scheduled the case for trial on the September 23, 2019, docket for New York, New York. The IRS filed a motion for summary judgment, with the settlement officer’s statement in support. The petitioners filed their objection to the motion for summary judgment.

In the Court’s analysis, the petitioners did not show there was a genuine issue for trial. Since the petitioners were in an installment agreement, the IRS did not sustain the proposed levy. The Court granted the motion for summary judgment because there was no genuine issue of material fact and removed the case from the September calendar.

Takeaway: To some degree, I think the petitioners had bad representation, but I think the biggest problem was a lack of understanding of IRS and Tax Court procedure. What are some indicators? They did not petition the Tax Court regarding the liabilities for 2012 and 2013 from the notice of deficiency. They (or their representative) did not respond or communicate with the settlement officer for the CDP hearing. They did not fill out their Tax Court petition correctly based on the original notice of determination.

I find that clients do not understand the difference between the various notices that provide them access to the Tax Court. Generally, the notice of deficiency allows them to contest the liability while a notice of determination concerning collection action is about abuse of discretion in a CDP hearing. It is critical to know what lane you are in to argue correctly and find success in the Tax Court.

Abuse of Discretion, Tax Protesters Penalized, and More: Designated Orders 7/8/19 to 7/12/19

This week of designated orders consisted of five orders on a variety of topics. One of them Keith Fogg already discussed so I will not focus on that case in depth. The other cases focus on abuse of discretion in a collection due process case, tax protesters being penalized, a whistleblower petitioner’s choice, and a ruling on requests for production of documents.

Docket No. 25751-15L, Joseph Thomas Lander & Kimberly W. Lander v. C.I.R., Order available here.
Keith Fogg wrote about this case’s proposed order here. I just want to add that I do not think the results seem very fair. The petitioners did not receive notice of their tax liability because the notices of deficiency were not sent to their address. Still, that counts against them. Also, the petitioners are unable to challenge the underlying tax liability because a postassessment conference with Appeals counts as an opportunity to dispute the liability. While the law is against them on these issues, the convoluted history of their tax proceedings combines to look like the petitioners are not receiving fair treatment.
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Abuse of Discretion for Collection Alternatives
Docket No. 17999-18SL, Milton W. Asher, Jr. v. C.I.R., Order available here.
Mr. Asher has tax liabilities for 2013 and 2014. Following a notice of intent to levy, he filed for a collection due process hearing. After receiving the hearing’s results, he petitioned the Tax Court. The IRS filed a motion for summary judgment and Mr. Asher filed his response to the IRS motion.
First, the Court looks at the history of the administrative hearing for collection due process. There, the settlement officer wanted Mr. Asher to file his 2017 tax return and show proof that estimated tax payments were paid in full for 2018. The officer also stated that past due estimated payments could be part of an installment agreement, but would not be acceptable for an offer in compromise.
Mr. Asher and his counsel did not submit any proof of checks regarding payments being improperly applied by the IRS or for an abatement of penalties.
In looking at the 2017 tax return, Mr. Asher had filed an extension and ultimately filed the tax return 2 months before the October 15 deadline. The estimated payments resulted in an overpayment that the IRS applied to reduce his 2014 liability.
For the 2018 tax return, there were three estimated tax payments made that resulted in a credit balance.
Beginning the Court’s analysis, Mr. Asher did not submit proof regarding the payments being improperly applied or abatement of penalties so those issues were barred in the Tax Court case.
However, Mr. Asher was in filing compliance for 2017 since the tax return was under extension and Mr. Asher filed the return 2 months before the October 15 deadline. Also, at the time of the hearing Mr. Asher only had one estimated tax payment in arrears. In fact, due to the variable nature of his income, it is not clear an estimated tax payment was due on April 15, 2018. The Court states it was an abuse of discretion for the settlement officer to limit his access to collection alternatives when he was compliant regarding the 2017 and 2018 tax years.
The Court granted the IRS motion for summary judgment with regard to the existence and amount of the liabilities for the 2 tax years in question, specifically additional tax penalties, the ability to raise issues regarding alleged payments made for the 2 tax years, or raise any further issues beyond what is next described.
The Court denied the IRS motion for summary judgment to allow collection alternatives for Mr. Asher. He may be allowed either an offer in compromise (based solely on inability to pay, not doubt as to liability) or an installment agreement.
The Court says the parties may wish to consider whether to move for a remand so that a different settlement officer is assigned to Mr. Asher regarding those listed collection alternatives.
Takeaway: Here is an example of an abuse of discretion in a collection due process case, though the scope is quite limited. The settlement officer’s limiting of the collection alternatives was misdirected so Mr. Asher gets to look into an offer in compromise or installment agreement.

Tax Protesters Penalized
Docket No. 11368-18L, William Michael Calpino, Jr. & Kelly Jo Calpino v. C.I.R., Order and Decision available here.
The petitioners had 3 previous Tax Court cases. Each time, the petitioners made tax protester arguments. The first time, the Court imposed a $1,000 penalty under section 6673. In the other two cases, the Court denied the IRS motion for sanctions but warned the petitioners that the Court has the ability to impose a penalty that does not exceed $25,000 under section 6673(a)(1) for making similar arguments.
Following the deficiencies in those two Tax Court cases, the IRS mailed to petitioners the final notices of intent to levy and their ability to request a Collection Due Process hearing. The petitioners requested such a hearing. They did not propose collection alternatives, but made further tax protester arguments.
When the settlement officer tried to schedule a phone conference, requested financial information for a collection alternative, and requested that the petitioners file their 2015 tax return, the response was a letter refusing to provide financial information and making further frivolous arguments.
From the notice of determination, the petitioners filed the current case with the Tax Court with (guess what?) more tax protester arguments. They also filed a frivolous motion to dismiss for lack of jurisdiction and motion for summary judgment similar to those denied in their first Tax Court case that led to the $1,000 penalty.
The IRS had filed a motion for summary judgment, motion to permit levy and motion to impose a penalty. The Tax Court granted all 3 motions. Based on the history for the petitioners with the Tax Court (such as making frivolous arguments when warned not to do so), the Court imposed the maximum penalty of $25,000.
Takeaway: The Tax Court only has so much patience with tax protesters and arguments the IRS terms as frivolous (for some interesting reading from the IRS on frivolous tax arguments, look here). The deficiencies at issue were about $16,000 for 2012 and 2013. I think it is ironic that making those arguments gained them no ground and more than doubled their liability for those years based on that maximum penalty they received.

Whistleblower Petitioner’s Choice
Docket No. 23105-18W, Jaroslaw Janusz Waszczuk v. C.I.R., Order available here.
The IRS filed a motion for protective order in a whistleblower case that the Tax Court assures is substantively identical to other protective orders filed in other whistleblower cases.
The Court is trying to inform petitioner about the commonality of the IRS motion because the petitioner filed a 136-page opposition to the IRS motion, stating it is “frivolous, meritless, and groundless”. Petitioner’s argument is that granting the motion would interfere with his current litigation in California courts or complaints with various state and federal law enforcement agencies. The Court suggests that the petitioner is using the whistleblower proceeding as collateral to and useful to unearth material for use in the other litigation and complaints.
The Court spells out plainly that the petitioner can either choose to withdraw his opposition to the motion or not withdraw the opposition, which will be denied. In choosing to withdraw his opposition, the petitioner will also have to certify that he will abide by court order prohibiting him from using the information furnished to him by the IRS outside the whistleblower case or face criminal felony punishment. The petitioner is assured that without the disclosure of the section 6103 information to him as a whistleblower, his whistleblower claim for reward shows little chance of success (though it is not a guarantee of success, either).
The Court goes on to say a lengthy response is not required and would be inappropriate. If that is what the petitioner does, it will be treated as unwillingness to withdraw the opposition. If petitioner tries to condition, qualify, or limit the withdrawal and compliance, that will also be treated as unwillingness to withdraw the opposition.
Takeaway: Hmm. Do what the judge says and withdraw the opposition or likely lose the case. Seems like an easy choice to me – pick # 1!

Privileges and Waivers
Docket Nos. 20940-16 and 20941-16 (consolidated), Tribune Media Company f.k.a. Tribune Company & Affiliates, et al., v. C.I.R., Order available here.
These cases have gone through several rounds of motions and are in the discovery phase before trial. This current order concerns IRS requests for production of documents. Tribune argued that the scope of one request should be limited and that everything has been produced for the second.
Regarding the discovery arguments, the Court discusses the limitations of relevancy and privileged information relating to the IRS requests. Specifically, Tribune objects to the production of documents in the first request based on the attorney-client privilege, the work product doctrine and the tax practitioner privilege under section 7525. However, those privileges were waived.
The Court reviews the scope of the waiver and generally sides with Tribune. For the first request, the Court agrees with 2 of the 3 limitations that Tribune asks for. On the second request, the Court takes Tribune at their word that they have complied with the document request.
Takeaway: If you are interested in learning more about privilege and waiver in discovery, reading this order would shed more light on that subject.

Shades of Graev and Whistleblower Awards: Designated Orders 6/10/19 to 6/14/19

While we come to another week for designated orders, this week only had a set of three released on the same day.  Two of the designated orders are based on bench opinions from Judge Carluzzo while another order comes from Judge Gustafson.  I will begin with Judge Carluzzo’s bench opinions, which touch on Graev regarding supervisor approval.  At the end, Judge Gustafson’s order delves into IRS approvals of a different sort, this time for whistleblower awards.

Taxpayer Substantations and Supervisor Approval for More Graev Considerations

Docket No. 13675-18S, Michael Hanna & Christina Hanna v. C.I.R., Order available here.

The first order does not stand out at the beginning as Mr. Hanna testified regarding his medical expenses and employee business expenses.  He provided no other proof regarding his medical expenses, vehicle expense deduction, or purchases of tools and supplies.  Since there was no substantiation, the judge sustained those denied deductions.

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Docket No. 11648-18S, David L. McCrea & Denise McCrea v. C.I.R., Order available here.

The second order also does not seem terribly noteworthy.  Ms. McCrea ran a business as a wholesale seller of herbal medical products.  At first, the McCreas disagreed with an IRS assessment of their beginning inventory and purchases, but came to accept the IRS adjustments. 

The McCreas still disagreed with the IRS regarding their ending inventory.  The McCreas want the value to be the amount on their Schedule C for 2014.  The IRS, however, provided a different exhibit received by the IRS revenue agent during the course of examination.  The document is a physical inventory, which the petitioners claim is taken at the end of each year.  The results are provided each year on a document to their return preparer, who claimed he used the document to prepare their tax return, but did not supply the document to the IRS.  In fact, it seems a mystery for the petitioners who provided the document to the IRS.  Even though the parties’ exhibits are similar, there are items omitted from the Schedule C document that are on the IRS exhibit.  The difference between the two values is $21,112.

Judge Carluzzo finds a compromise.  The ending value on the Schedule C shall be supplemented with the items on the IRS exhibit that are not shown on the Schedule C.  The result needs to be calculated and will either match the Schedule C or a lesser amount.

The likely reason both orders were designated by Judge Carluzzo comes from an examination in both cases of 6662(a) penalties.  The evidence in each case showed that a supervisor approved imposition of a penalty on a date that preceded the issuance of the notice of deficiency.  The petitioners for each case were first formally advised regarding the imposition of the penalty on a date that preceded issuance of the notes.  As a result, the IRS imposition of the section 6662(a) penalties were rejected.

Takeaway:  Judge Carluzzo is reviewing 6662(a) penalties and will reject those penalties if they do not line up correctly in the timeline.

Whistleblower Claim Remanded to Whistleblower Office for Further Consideration

Docket No. 13513-16W, Loys Vallee v. C.I.R., Order available here.

In a whistleblower case, one of the main questions under IRC section 7623(b) is “whether the IRS collected proceeds as the result of an administrative or judicial action using the whistleblower’s information.”

Petitioner Loys Vallee provided information to the Whistleblower Office, but he was denied a claim by the IRS for a whistleblower award.  At issue before the Tax Court is the completeness of the administrative record.  Mr. Vallee filed a motion to compel production of documents in 2017 that led to what the IRS contends is the complete administrative record in 2018.  The parties filed their responses concerning the completeness of the record and it is now before the judge to make a decision.

The debate concerns the number of individuals who received the information and whether they forwarded that information to other IRS employees.  Partially, this debate is supported by the fact that not all the declarations stated that they did not forward Mr. Vallee’s filed information to any other group or person than those stated in the declaration.  Mr. Vallee provides his own list of individuals who had access to the information he provided.

Mr. Vallee makes statements concerning Corporation D, Related A, and Related B in his submissions to the Court.  Corporate D and Related A consolidated and he argued the consolidation allowed Corporate D to use Related A’s accumulated tax credits to satisfy its own tax liability in a method known as refund netting.  The Tax Court notes that Mr. Vallee did not use the term refund netting in his Form 211 or the lengthy attachments so cannot advance a new claim or try to cure deficiencies in previous claims.

The Court reviews the information from the IRS and notes there is an issue with what they provided.  The IRS states that the four individuals they cite that received the information followed the protocol of the Internal Revenue Manual (IRM) and kept the petitioner’s information confidential.  They have provided a declaration for one individual named and state there was no need to follow up with the other three individuals since her form provides feedback about the division.  Judge Gustafson disagrees, stating that while the actions discussed indicate the individuals followed IRM provisions, the IRS needs to provide affidavits or declarations concerning the other three individuals.  The declaration in question provided cannot cover personal knowledge about the actions of the other three individuals.

The judge says that there are still two unanswered questions regarding Mr. Vallee’s entitlement to a whistleblower award.  Who received the Form 211 information and what did they do with it?  Was that information used in an examination that resulted in the collection of proceeds?  Even though Mr. Vallee argues against remand, the judge shows that it is proper in a whistleblower award determination for remand regarding an insufficient administrative record.

Ultimately, the case is remanded to the Whistleblower Office for further consideration of those two questions and development of the administrative record.  The Whistleblower Office is to issue a supplemental determination with an explanation of the determination regarding the two questions.  They are to certify additions to the administrative record and that what has been provided constitutes the entire administrative record.  The judge ends by requiring the parties to provide (joint or separate) timetables for further administrative proceedings.

Takeaway:  There have been several looks at whistleblower claims in designated order blog posts in Procedurally Taxing.  While I do not know how much the IRS approves whistleblower claims, we get to review the denials.  From this vantage point, it seems like the IRS will fight the claims as much as possible.  The IRS basically attacks the claims on either of two fronts: (1) no action was taken by the IRS against anyone mentioned in the information provided or (2) any actions taken by the IRS concerning the individuals or businesses mentioned in the information provided by the whistleblower was based on other information and not based on the information provided by the whistleblower.

Mr. Vallee is fighting in Tax Court concerning the completeness of the administrative record and Judge Gustafson supports that fight by requiring the IRS to update who received that information and what actions they took.  Ultimately, the answer to be settled is whether the IRS took action against the businesses in question based on Mr. Vallee’s submission, settling whether he truly has a whistleblower claim.

Collection Due Process and Webber v. C.I.R.

I am part of the Collection Due Process (CDP) Summit Initiative that Carolyn Lee wrote about in a recent post to Procedurally Taxing.  The initiative consists of a group of tax practitioners and others working with the IRS to discuss CDP issues toward the goal of eventual improvements for the IRS and taxpayers.  The genesis of that initiative comes from a panel I was on as part of the American Bar Association May Meeting this year in Washington, D.C.  Among others, that panel included Carolyn, Keith Fogg, and Judge David Gustafson of the U.S. Tax Court.  More information is available here.

Recently, when I read a particular order submitted by Judge Gustafson during a week Samantha Galvin was monitoring Tax Court designated orders, I requested to submit a separate piece focusing on that order. Since I knew Judge Gustafson had an interest in CDP issues and since he spends a good portion of the order’s focus on CDP procedure, I wanted to provide some analysis of its significance.

The designated order in Scott Allan Webber v. C.I.R., here, has facts that on their face can be simply summarized (a CDP request mailed by a taxpayer to the wrong address led to an IRS motion to dismiss in Tax Court), but what makes the order so interesting instead are procedural issues and Judge Gustafson’s analysis.

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Procedural Issues

The procedural history for Mr. Webber begins with his 2013 income tax liability.  After the IRS assessed a liability which he did not pay, the IRS mailed to Mr. Webber a Notice LT11, the CDP Notice.  That notice is a notice of intent to levy and notice of right to a hearing.  Judge Gustafson describes the LT11 as performing double duty, because it also serves as a demand for payment by its conspicuous language and larger type.

At the top of page 1 for Mr. Webber’s LT11, the return address showing where the IRS mailed the notice from was a post office box in Philadelphia, Pennsylvania.  At the bottom of page 1, with payment information, there was listed a post office box for the IRS in Kansas City, Missouri.  The bottom of page 2 also provides the post office box for the Philadelphia address on the reverse side of the Kansas City address.  To summarize:  two addresses for Philadelphia on pages 1 and 2 with an address for Kansas City on page 1, but on the reverse side of the Philadelphia address on the second page.

Mr. Webber filled out Form 12153 to request a CDP hearing.  He filled out his paperwork correctly until it came to how he placed the paperwork in the envelope (with the address showing through the cellophane) on where to mail his form to the IRS.  He placed the Kansas City address facing out in the envelope as though he was making payment rather than requesting a CDP hearing, mailing it to the incorrect address for making a CDP request rather than to the Philadelphia address to which the IRS wanted a CDP request to go.

He mailed his Form 12153 on February 22, 2018, for the CDP hearing which had a request deadline of March 4, 2018.  March 4 was a Sunday so timely arrival would have been on or before Monday, March 5.  The request was received by the IRS in Kansas City on Thursday, March 1.  Five calendar days (three business days) later, the Kansas City location faxed the CDP hearing request to the Philadelphia location on Tuesday, March 6.  Effectively, the CDP hearing request arrived at the correct location one day after the deadline.

IRS Appeals treated the CDP hearing request as untimely so did not grant a CDP hearing, but an equivalent hearing.  The CDP hearing is subject to judicial review by the Tax Court, but an equivalent hearing is not.  A CDP hearing produces a Notice of Determination that supports Tax Court jurisdiction.  Mr. Webber received a Decision Letter dated June 13 based on his Equivalent Hearing.  Mr. Webber timely mailed a Tax Court petition even though he received the equivalent hearing’s form. The case stating the Tax Court can review an equivalent decision letter as if it were a notice of determination is Craig v. Commissioner, 14649-01L, here.

On May 22, 2019, the IRS filed a motion to dismiss for lack of jurisdiction.  In the motion, the IRS stance is that the hearing request was timely mailed, but sent to the wrong address.  Receipt to the correct address a day late means the taxpayer is not entitled to a CDP hearing.

Judge Gustafson’s Analysis

Judge Gustafson’s order requested a supplemental memorandum from the IRS regarding their motion to dismiss regarding two issues:

1. The addressing of the CDP hearing request

Judge Gustafson cites Question and Answer C6 of Treasury Regulation § 301.6630-1(c)(2), which states the written request for a CDP hearing must be sent to the IRS office and address as directed on the CDP notice.  He points out that there were not one, but two addresses on the CDP notice.

From there, Judge Gustafson mentions how he almost mailed a bill payment to an incorrect address in a similar fashion.  “That is to say, we sympathize with a taxpayer who is confused by the design of Notice LT11.”  He also notes that the IRS has to deal with complex paperwork for the nation and “it is entirely reasonable for the IRS to request a given type of document to be submitted to a given location.”

Judge Gustafson summarizes his position regarding the address issues with Notice LT11 best in this paragraph:

However, where the IRS intends to require that a CDP hearing request be sent to a particular address, and where it takes the position that a CDP hearing request sent to a different address is invalid and ineffectual, and where it argues that the use of the wrong address ultimately deprives the Tax Court of jurisdiction over the case–in such a circumstance, we wonder whether an occasion for confusion is predictably and unfairly created by (a) combining the CDP notice with a gratuitous demand for payment, (b) providing multiple address slips back to back with multiple addresses , (c) putting the wrong address slip on the front page of the notice, and (d) failing to label the CDP address slip with any indication that it is the CDP address slip. It would seem reasonable for the IRS either to insist that a CDP hearing request must be sent to a specific address or to decide to make use of its mailing of a CDP notice for the additional purpose of soliciting payments to be mailed to a different address–but probably not both.

2. The timeliness of the CDP hearing request

Looking at Internal Revenue Code §§ 6330 (a)(3)(B) and (a)(2), Judge Gustafson notes that a taxpayer has the right to request a CDP hearing within the period of “30 days before the day of the first levy” while other statutory language cited by the IRS refers to the “30-day period commencing the day after the date of the CDP notice.”

The judge states he would benefit from the IRS filing the supplement to the motion and would also like them to state how they reconcile the statutory language above with the position taken in the motion to dismiss.  Additionally, the judge requested to know when (if ever) the IRS made a “first levy” with respect to Mr. Webber’s liability, and the IRS position whether treating a CDP hearing request as untimely in such a circumstance constitutes an abuse of discretion by Appeals. 

Taylor v. C.I.R.

First of all, I would like to take a detour into another Tax Court order that I found when researching CDP for the panel presentation I mentioned above.  I came across Rodney A. Taylor v. C.I.R., order here, which is an order by Judge Carluzzo.  In the order, we have a similar CDP situation.  Here, the Tax Court petitioner timely mailed the CDP hearing request to the IRS, but sent it to the wrong address.  By inference, it made it to the correct address after the deadline.

The order is two paragraphs long so I could quote it in its entirety, but I will focus on this: 

because respondent has not demonstrated sufficient prejudice resulting from the manner that the request was mailed to insist upon strict compliance with the Treasury Regulations relied upon in support of his motion, we find that petitioner’s request for an administrative hearing was timely made.

The decision letter was treated as an equivalent of a notice of determination to allow for Tax Court jurisdiction.  Judge Carluzzo ordered that the IRS motion to dismiss for lack of jurisdiction is denied.

Judge Carluzzo gets to his result in a direct fashion.  While he lacks Judge Gustafson’s analysis in this order, he makes the point that the IRS should show how they suffered prejudice by receiving a CDP hearing request at the wrong address within the IRS bureaucracy or he will deny their motion to dismiss for lack of jurisdiction.

Fallout

After the entry of the order requesting that the IRS provide responses regarding its motion to dismiss, Keith Fogg, through the Legal Services Center of Harvard Law School, entered his appearance for Scott Allan Webber.  He did not want to comment on current litigation, but shared with me documents filed in the case.

The IRS filed a motion to withdraw the motion to dismiss for lack of jurisdiction.  The body of the motion is 2 pages and cites Judge Gustafson’s order, where he ordered them to supplement the motion to dismiss for lack of jurisdiction “unless [the Commissioner] withdraws his motion to dismiss.”  Basically, the IRS takes door number two and quietly exits the stage.  There is no explanation of IRS reasoning regarding either of the motions.

The Harvard clinic filed a response in support of the IRS motion to withdraw.  Basically, their stance is that the 30-day statutory period to request a CDP hearing is a nonjurisdictional claims-processing rule subject to equitable tolling and waiver, which they claim are present in Mr. Webber’s case.  I am not going to steal the clinic’s thunder regarding its arguments for equitable tolling and waiver as it will take further space to summarize those pages.  I will note that he does disclose adverse legal authority in the Tax Court as Judge Nega granted IRS motions to dismiss in two cases involving the same taxpayer (Nunez v. Commissioner, 2925-17L here and 2946-17L here).  I found the response to be well drafted and note that the response was prepared with assistance by law students Michael Waalkes and Silvia Perdochova.

Judge Gustafson granted the IRS motion to withdraw by a court stamp that states “granted” on the motion.  While it would have been nice if there was an opinion from Judge Gustafson on the jurisdictional issues, it was not to be.  Though the Tax Court has the Webber case scheduled for trial on September 16, the jurisdictional portion is no longer at issue.

Conclusion

It is difficult to draw conclusions from this case regarding positions from the IRS and the Tax Court.  The IRS did not say much and the Tax Court says less.  From the Tax Court, I noted that some past orders look to be taxpayer-friendly while others seem to favor the IRS.  From the IRS in this case, the motion to dismiss took the stance that a day late is not good enough and then backtracked for unstated reasons following Judge Gustafson’s order requesting further explanation.

Overall, my takeaway from the filings in this case are that there are problems with the CDP process affecting everyone involved.  Judge Gustafson pointed out several issues with the LT11.  It is framed like a billing statement, not a notice for informing taxpayers of their rights.  It is confusing for taxpayers on where to mail Form 12153 to request a CDP hearing due to multiple addresses listed on the notice.  Perhaps a centralized address would be better.  If a taxpayer makes a mistake and timely mails the form to the wrong address within the IRS organization, what should be the result?  What should be made of the different 30-day standards Judge Gustafson cites regarding timeliness?  In the clinic’s response, it makes several arguments that the 30-day statutory period is a nonjurisdictional claims-processing rule subject to equitable tolling and waiver.  I do not know that this case brought answers, but it certainly brought several questions regarding CDP.

I am proud to be part of a CDP Summit initiative that is working to bring improvements to the CDP process.  I am glad that we are sparking conversations with various IRS departments, private practitioners, LITC directors, Tax Court judges, and others to develop processes that bring benefit to the tax system and everyone involved.  Hopefully we can learn lessons from Webber to improve the CDP process for taxpayers in the future.