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.

Designated Orders: Whether to Set Items Aside and Denied Motions for Summary Judgment (4/15/19 to 4/19/19)

This week brought a series of five designated orders. The subjects include Collection Due Process, Notices of Federal Tax Lien, settlements agreements, innocent spouse analysis, and denied motions for summary judgment.

Setting Aside a Notice of Federal Tax Lien?
Docket No. 3402-18 L, Esteban Baeza v. C.I.R., Order & Decision available here.

This case concerns Collection Due Process (CDP) for a notice of federal tax lien for years 2012 to 2015.

Mr. Baeza’s issues for 2012 are quickly dealt with. For 2012, Mr. Baeza filed an amended tax return that took care of his liability and resulted in a tax refund. The lien has been released so the IRS moved that the case be dismissed for that year on grounds of mootness. Mr. Baeza did not object so the Court granted that motion.

For years 2013 to 2015, Mr. Baeza had liabilities for those years and eventually entered into an installment agreement concerning the three years. However, the IRS machinery was already working and days before he entered into the installment agreement, they sent him a Notice of Federal Tax Lien, showing liabilities totaling about $58,000 for the three years. It is presumed he did not have that notice before entering into the installment agreement.


Mr. Baeza’s representative sent a form 12153 to the IRS, requesting a Collection Due Process hearing. The form requested withdrawal of the lien because of the installment agreement. There was no dispute of the liability or proposal of collection alternative (beyond the installment agreement in place). The argument was that the lien was improper due to the pending installment agreement.

IRS Appeals determined that all required legal procedures were followed in filing the notice of federal tax lien. The notice of determination had an attachment explaining why withdrawal was not appropriate.

The IRS filed a motion for summary judgment but Mr. Baeza did not respond. Because it is reasonable the IRS filed a notice of lien in order to protect its ability to collect in the event Mr. Baeza fails to fulfill the terms of the installment agreement and Mr. Baeza also did not provide arguments against that filing, Judge Gustafson granted the motion for summary judgment concerning tax years 2013 to 2015.

Takeaway: The notice of federal tax lien filing is routine for the IRS in collection cases, even when a taxpayer sets up an installment agreement. As the standard of review in Tax Court for these CDP cases is abuse of discretion by the IRS, the petitioner will need to actually make an argument concerning an abusive IRS practice in order to overcome the IRS motion for summary judgment.

Setting Aside a Signed Settlement?
Docket No. 27486-16, Edward Roberson & Connie Roberson v. C.I.R., Order and Decision available here.

The IRS sent the Robersons a notice of deficiency for 2011 and 2012 and Mr. Roberson a notice of deficiency for 2013 and 2014. The Robersons timely petitioned the Tax Court for a redetermination of both notices of deficiency. The IRS eventually amended its answer to assert Schedule C gross receipts for 2014.

The case was calendared for trial and called on November 5, 2018. After the case was called but before trial, the parties submitted a signed stipulation of settlement. The parties agreed in the stipulation that Mr. Robersons’ 2014 Schedule C gross receipts were $108,717 and gross expenses were $30,616. Counsel for both parties signed the stipulation. The Court gave the parties until January 7, 2019, to submit a decision reflecting the stipulation.

In November 2018, the IRS mailed the Robersons a proposed decision reflecting the stipulation for all years at issue. The IRS returned to work on January 28, 2019, (following the government shutdown) and found the Robersons had not signed the decision. They informed the IRS they would not sign the proposed decision.

The IRS filed a motion, asking the Court to enter a decision pursuant to the stipulation of settlement. The Robersons responded to the motion with new calculations adjusting the 2014 Schedule C gross receipts from $108,717 to $68,019 and gross expenses from $30,616 to $55,268, with penalties and interest adjusted accordingly.

Judge Buch analyzed the situation, stating that the claim of an error in the stipulation does not relieve the Robersons from responsibility for signing the stipulation. The Court may modify or set aside a stipulation that is clearly contrary to the facts, but does not set aside a stipulation consistent with the record simply because one party claims the stipulation is erroneous. They may grant relief if a party asserts contractual defenses, but a unilateral mistake of fact in a binding, unambiguous stipulation is not a ground for relief.

In this case, the Robersons did not present contractual defenses. They raised the issue of the error only after entering into the stipulation. Their unilateral mistake (if there is one) is not grounds to set aside a contract. The Court is unlikely to grant relief from a stipulation entered into after considerable negotiation. The Robersons note that the stipulation was following a “take-it-or-leave-it” offer by the IRS. Judge Buch points out the Robersons and their counsel were on notice of the IRS amended answer so all parties signed the stipulation long after being aware of what was at issue and had ability to go to trial. The judge was reluctant to relieve the petitioners from a stipulation after already entering into the stipulation with full knowledge of the relevant facts, so granted the IRS motion for entry of decision.

Takeaway: This case details the difficulties to avoid signing a decision after signing a stipulation. The stipulation will generally bind the parties and the judge detailed the few exceptions. One should expect to sign the decision after signing a stipulation in a Tax Court case.

Innocent Spouse Analysis
Docket No. 5680-18S, Elaine S. Thomas, Petitioner, & Robert Roy Thomas, Intervenor, v. C.I.R., Order (bench decision) available here.

The petitioner and intervenor married in 1987 and divorced in 2016. The parties filed a joint tax return in 2012 and had a liability for that year of $5,551, which the parties stipulate was due to the intervenor.

The petitioner had filed for innocent spouse relief for that year, which was denied by the IRS, and filed a subsequent petition to Tax Court concerning that decision and the intervenor filed to be a party to the Tax Court case.
Judge Carluzzo agrees with much of the analysis and conclusions in the IRS pretrial memorandum and comments on the areas of disagreement. First, the judge finds that petitioner did not know, or have reason to know, that the intervenor would not pay the unpaid liability shown on the return. The judge considers the factor neutral, rather than weighing against relief, as the IRS categorized it.

In the marital separation agreement, both former spouses agreed to split the IRS liability. The judge weighs this factor against granting relief, though the IRS categorized it as neutral.

The judge notes that he arrived at the same score of factors as the IRS – one in favor, one (possibly two) against relief, and the rest neutral – but the analysis is not simply mathematical.

The judge details what influenced him concerning the case. He is particularly influenced by petitioner’s agreement to pay half the 2012 liability. Next, by the decision of the spouses to pay other expenses than the 2012 income tax liability as they had the resources to pay the liability but chose to save or allocate funds for other purposes. Finally, that the liability is mostly, or entirely, due to intervenor.

Giving effect to the marital settlement agreement, the judge sees no reason why it is inequitable to hold the parties liable for their shares of the debt. The decision is then to provide innocent spouse relief to petitioner regarding the excess of one-half of the unpaid 2012 federal income tax liability reported on the 2012 tax return. Essentially, each of the former spouses is liable for one-half of the tax debt, reflecting their marital settlement agreement.

Takeaway: As noted, innocent spouse relief is not a mathematical decision concerning what is in one column or another. The judge will consider the facts and circumstances to determine what will weigh heaviest concerning relief.

Denied IRS Motions for Summary Judgment
1. Docket No. 19146-18 L, Jason E. Shepherd v. C.I.R., Order available here.
In this Collection Due Process case before Tax Court, Petitioner filed for review of a Notice of Federal Tax Lien concerning unpaid employment taxes and trust fund penalties concerning unpaid employment taxes quarterly periods from 9/2010 through 12/2011. The IRS filed a motion for summary judgment and Petitioner opposed the motion by asserting challenges to material facts.

Of note for trust fund penalties is that a Letter 1153 must either be personally served on the responsible person or sent by certified mail to the responsible person’s last known address. In the record on the IRS’s motion there is no copy of a Letter 1153 or any proof that it was either personally served on the petitioner or sent by certified mail to his last known address. Since the record did not prove that the Appeals Officer verified all applicable laws or administrative procedures were met concerning the assessment of the section 6672 penalties, Judge Leyden denied the IRS motion for summary judgment without prejudice.

2. Docket No. 1781-14, John Edward Barrington & Deanna Barrie Barrington v. C.I.R., Order available here.

The petitioners have previously been convicted for tax evasion based on guilty pleas – John Barrington for tax year 2005 and Deanna Barrington for tax years 2003 through 2005. The Court granted in part and denied in part an IRS Motion for Partial Summary Judgment through its order dated June 19, 2015. The order held the IRS was entitled to summary judgment so far as the petitioners fraudulently failed to file tax returns. The order denied the request to the extent the IRS sought to collaterally estop the petitioners from contesting they failed to report certain amounts of income for the years at issue and further collaterally estop John Barrington from contesting he fraudulently failed to file tax returns for tax years 2003 and 2004.

The IRS filed a new Motion for Summary Judgment on February 22, 2019. This motion included several of the same arguments and factual assertions as before, but now includes the argument that John Barrington made “judicial admissions” at a hearing held December 17, 2018 (with those admissions eliminating the need for trial). IRS Counsel cites his statements of “…I’m not arguing the fraud amount” and “…cannot argue the fraud on it, which we’re not.”

Judge Panuthos reviewed the 28 page transcript and did not come to the conclusion that John Barrington made a clear, deliberate and unequivocal factual assertion relating to the issue of fraudulent failing to file federal income tax returns for tax years 2003 and 2004. Since there is a dispute as to material fact, the Court denied the IRS’s motion.

Takeaway: These look to be times the IRS either tried to rush procedure or believed there was no dispute as to material fact and lost regarding motions for summary judgment.

Procedurally Taxing at the ABA Tax Section 2019 May Tax Meeting

The American Bar Association Tax Section 2019 May Tax Meeting commences in Washington, D.C. and runs May 9 through 11, 2019. Several Procedurally Taxing contributors will be speaking at the conference and this is your guide to finding those sessions.


Leslie Book –
Saturday, May 11, 9:30 – 10:30 a.m.
Pro Bono & Tax Clinics Committee
Procedural Due Process and the Tax System: A Fresh Look.

Procedural due process is rooted in the Magna Carta and is embedded in our constitution. The right to notice and the opportunity for a hearing are the two key ways that the constitution helps ensure that the sovereign does not erroneously deprive people of essential rights, including the right to property. Procedural due process, a concept closely related to procedural justice, ensures that the sovereign treats its subjects as human beings entitled to a sense of dignity and is a foundational aspect of good government in general and tax administration in particular. In this panel, we will explore the historical roots of procedural due process jurisprudence, consider the ways that that current and proposed IRS procedures relate to due process protections and procedural justice norms, and explore insights from areas other than tax when there have been challenges to agency actions that violate procedural due process protections.
Moderator: Sarah Lora, Legal Aid Services of Oregon, Statewide Tax Clinic. Portland, OR
Panelists: Professor Leslie Book, Charles Widger School of Law, Villanova University, Villanova, PA and Professor in Residence, Taxpayer Advocate Service, Washington, DC; Nina E. Olson, National Taxpayer Advocate, Taxpayer Advocate Service, Washington, DC; Professor Susannah Camic Tahk, University of Wisconsin School of Law, Madison, WI
Cosponsored by: Individual & Family Taxation and Teaching Taxation
Note: Professor Jamie Andree, Maurer School of Law, Indiana University, Bloomington, IN, is no longer able to attend due to injury.

Keith Fogg –
Thursday, May 9, 1:45 – 2:45 p.m.
Tax Bridge to Practice, Sponsored by: Young Lawyers Forum and Diversity Committees
Statutes of Limitations in Tax Litigation: Friend or Foe?

Statutes of limitations are an important, but often overlooked, aspect of tax litigation that can work to the advantage or the detriment of a party. Most practitioners are familiar with the general three-year period of limitation on assessment, as well as basic exceptions, including those for a false return, no return, or a substantial omission of gross income. This panel will address more nuanced rules affecting statutes of limitations in tax, including the interplay of section 6511(a) and (b) in refund suits (and, as appropriate, Tax Court litigation), the failure to notify the IRS of certain foreign transfers, and the failure to disclose listed transactions. The panelists will also discuss strategies for navigating statute of limitation issues in litigation, as well as the effect of the government shutdown on both statute of limitations and filing deadlines with courts and the IRS.
Moderator: Kelley C. Miller, Reed Smith LLP, Washington, DC
Panelists: Paul Butler, Kostelanetz & Fink LLP, Washington, DC; Professor T. Keith Fogg, Director of the Federal Tax Clinic, Harvard Law School, Jamaica Plain, MA; Elie Mishory, Attorney, Office of Associate Chief Counsel (Procedure and Administration), IRS, Washington, DC; Lawrence A. Sannicandro, McCarter & English LLP, Newark, NJ; Rebecca M. Stork, Eversheds Sutherland LLP, Atlanta, GA
Co-sponsored by: Court Procedure & Practice and Young Lawyers Division Tax Law Committee

Keith Fogg & William Schmidt –
Friday, May 10, 9:00 – 10:00 a.m.
Individual & Family Taxation Committee
CDP – Beyond the Weeping and Gnashing of Teeth; What Can be Done to Fulfill CDP’s Beneficial Intent?

Collection due process (CDP) rights launched twenty years ago to provide additional procedural protections to taxpayers facing tax liabilities. CDP is an essential part of the practitioner’s toolkit: It offers independent review of IRS collection actions, including the chance for alternatives to enforced collection and, in certain instances, review of the liability itself. CDP may be used to achieve meaningful and lasting collection resolutions for both pro se and represented taxpayers. However, CDP also may be an expensive and emotionally wrenching experience for taxpayers who enter the process in good faith, only to be greeted by inflexible, unrealistic deadlines, overworked IRS professionals applying cookie cutter tactics to move a file off their desk, and a Court swamped with equally cookie cutter motions for summary judgment by the IRS against which pro se taxpayers are ill-equipped to defend. Even seasoned tax practitioners are frustrated by inadequate case records, inelastic government responses, and seemingly limited judicial remedies. This program will move beyond “let me tell you how it all went wrong” to brainstorm what realistically might be done to fulfill the promise of CDP.
Moderator: Carolyn Lee, Morgan Lewis and Brockius, San Francisco, CA
Panelists: The Honorable David Gustafson, US Tax Court, Washington, DC; Professor Keith Fogg, Harvard Law School, Boston MA; Mitchel Hyman, IRS Office of Chief Counsel, IRS, Washington, DC; William Schmidt, Kansas Legal Services Low Income Tax Clinic, Kansas City, KS; Professor Erin Stearns, University of Denver Low Income Tax Clinic, Denver, CO
Co-Sponsored by: Pro Bono & Tax Clinics

I will be speaking with Keith Fogg at the panel listed above. First of all, I want to thank Leslie Book for providing creative input at the starting stages of planning the panel. Next, I want to mention that the panel is not going to be a history or a gripe session about collection due process. It is a panel designed for dialogue between practitioners in several areas of tax law with the intent of finding solutions to improve taxpayer interactions with the IRS. We will be looking at the administrative and judicial levels, plus discussing creative remedies that may be available. We hope this panel brings more debate and leads to positive systemic change.

Christine Speidel –
Saturday, May 11, 8:30 – 9:30 a.m.
Pro Bono & Tax Clinics Committee
Family Members as Caregivers

Section 131 promotes community care for disabled adults by excluding certain state payments from caregivers’ gross income. Historically, Service challenged the excludability of payments to a parent caring for an adult disabled child in the provider’s home. In 2014 the Service reversed this position for certain Medicaid waiver payments, effecting a major economic change for affected families. This panel will discuss the impact of the 2014 guidance, areas of continued uncertainty, and other remaining barriers to the uniform treatment of caregivers’ income.
Moderator: Camille Edwards Bennehoff, Attorney, IRS Office of Chief Counsel (Income Tax & Accounting), Washington, DC
Panelists: Victoria J. Driscoll, Senior Attorney, IRS Office of Chief Counsel (Income Tax & Accounting), Washington, DC; Professor Christine Speidel, Villanova University Charles Widger School of Law, Villanova, PA; Wayne Turner, Senior Attorney, National Health Law Program, Washington, DC
Cosponsored by: Individual & Family Taxation and Diversity

Caleb Smith –
Thursday, May 9, 3:45 – 5:00 p.m.
Low Income Taxpayer Representation Workshop (Pro Bono & Tax Clinics Committee)
EITC and Benefits Law: Conceptualizing, Understanding (and Navigating) the Interplay of EITC and Benefits Law

What makes the EITC “different” from other tax provisions? And when do those differences matter (in a legal sense)? This panel will discuss the history and purpose of the EITC, how it interfaces with other disparate areas of law like benefits and bankruptcy.

Moderator: Professor Caleb Smith, University of Minnesota Law School, Minneapolis, MN
Panelists: Margot Crandall-Hollick, Congressional Research Service, Washington, DC; Carrie Welton, Center for Law and Social Policy, Washington, DC

Designated Orders: Too Little, Too Late (3/18/19 to 3/22/19), Part Two

In Part One of this week’s designated orders, I discussed four orders where the petitioners either did too little or were too late. In the following case, the petitioners did way too much so the final designated order of the week merits an examination of its own.

Too Much
Docket No. 20102-17, Victor Maurice Brown & Kimberly Denise Brown v. C.I.R., available here.

There is a lot to unpack in this case where the petitioners, the Browns, have been overzealous in their litigation.


• Tax Years 2014 and 2015 Notices

The IRS issued a notice of deficiency to the Browns for tax year 2014. The Browns did not file a petition with the Tax Court within the following 90-day time period. The IRS next issued a notice of intent to levy to the Browns for the 2014 tax year. The Browns did not file an appeal with the IRS within the 30-day time period for a Collection Due Process (CDP) case. The IRS later issued to the Browns a notice of intent to seize property for tax year 2014. This is a notice that does not support jurisdiction for a CDP case in Tax Court. Finally, the IRS issued to the Browns a notice of deficiency for tax year 2015 of $3,728, resulting from alleged unreported income from the sales of securities.

• The Browns’ Petition

The Browns filed their petition by attaching the valid 2015 notice of deficiency, plus the invalid 2014 notice of intent to levy and notice of intent to seize property. The petition stated “Deficiency-2015; Determination-2014.”

But, wait, there’s more!

The Browns’ petition describes a dispute Ms. Brown had with her former employer and alleges errors the employer made in reporting Ms. Brown’s 2014 compensation. Within the petition, there is a prayer for relief, which asks for: punitive damages for emotional distress (likely from the employer, filing false documents with the IRS), punitive damages for emotional distress (again likely from the employer as ‘redress for undetectable torts’), compensatory damages from the employer, that the Court grant the Browns a withdrawal of the 2014 tax year lien, “an increase in the recovery limit due to the unauthorized collection activities in connection with the collection of Kimberly Brown’s federal tax by way of unauthorized W-4 Withholding changes,” filing fees for amended tax returns for tax year 2014 and tax year 2015, a jury trial, all other relief the court deems just and proper, and “temporary, preliminary and permanent injunctive relief prohibiting further malicious and deceitful conduct.” The Browns did not later file an amended petition, nor any motion for leave to amend their petition.

• Dismissal of 2014

The IRS filed a motion to dismiss tax year 2014 from the case and the Court issued an order February 28, 2018, holding that the Browns’ petition was not timely filed regarding the 2014 notice of deficiency and that no notice of determination conferring jurisdiction had been sent to petitioners for 2014. The IRS motion was granted regarding dismissal of tax year 2014. References to that year were deemed stricken from the record, with a reminder that tax year 2015 was still pending before the Court.

• The Browns’ Subpoena

The Court issued notice that the case would be tried in Atlanta, Georgia, at the calendar beginning April 29, 2019. The Browns used Tax Court Form 14 to fill out a subpoena duces tecum and sent that to IRS counsel. The subpoena asks for various documents related to tax years 2014 and 2015. The subpoena does not list the production date as the trial date of April 29, but rather lists March 15. The place of production is not the courtroom, but the office of IRS counsel. A letter attached by the Browns indicates they did not include the fees and mileage required by Tax Court Rule 148.

• The IRS Motion for Entry of Decision

The IRS filed a motion for entry of decision in favor of the Browns for tax year 2015. The decision would be that there is no deficiency in income tax from and no refund due to the Browns for the 2015 tax year. The motion stated that the IRS Appeals Office agreed to concede all issues asserted on the 2015 notice of deficiency. However, the Browns refused to accept the concession, and objected to the granting of the motion. The Court ordered that the Browns were to state their objections with a succinct statement of their preferred decision and a succinct description of the issues no later than March 15, 2019.

The Court received the Browns’ response on March 18, 2019. They argue that the IRS motion attempts to circumvent the proper judicial review of the matters at issue, calling them “new matters” with contentions (1) the issuance of the notice of deficiency was the IRS proceeding in bad faith against the petitioners, (2) “the Court’s review of the evidence relative to tax year 2014, will demonstrate a systemic year-over-year pattern of fraudulent misstatements and other inaccuracies,” (3) “pursuant to the Federal Rules of Civil Procedure Rule 19, by order of this Court, the Court shall order AT&T be made a party to this case as a defendant,” (4) the IRS failed to develop facts supporting its position before issuing the notice of deficiency, (5) the burden of proof is on the IRS, pursuant to IRC section 7491(a) and Tax Court Rule 142(a), (6) the notice of deficiency lacked a factual relationship to the petitioners’ liability, (7) the IRS committed “fraud on the Court” and took positions it knew to be false, (8) for various reasons the determinations in the notice of deficiency are incorrect, so the Browns do not owe the tax asserted, and (9) the IRS has “engaged in unauthorized collection activities.” The response did not assert any overpayment for 2015 or any claims for litigation or administrative costs under Tax Court Rule 230 or IRC section 7430.

• The Browns’ Motion to Show Cause

The Court received on March 14, 2019, a Motion to Show Cause Why Proposed Facts in Evidence Should Not Be Accepted as Established from the Browns, filed pursuant to Tax Court Rule 91(f). Their Proposed Stipulation of Facts which accompanied the motion included a preamble listing 13 “new matter” issues. The stipulation included 152 numbered paragraphs of factual assertions with subparagraphs. Some issues and many allegations in the proposed stipulation relate to tax year 2014.

• Judge Gustafson’s Responses

The judge reviewed the Tax Court’s jurisdiction for this case. The Court has jurisdiction over the notice of deficiency for tax year 2015. They do not have: jurisdiction over the disputes between Ms. Brown and her former employer (or the ability to award damages for the dispute); authority under the Federal Rules of Civil Procedure to order a third party to be joined as a defendant; jurisdiction under IRS liens, levies or other collection activity without a timely CDP request (or other required documents); jurisdiction to award fees for filing amended tax returns or any other fees other than those allowed under IRC section 7430. The Tax Court judge is the trier of fact and the Tax Court is not authorized to conduct jury trials. The Anti-Injunction Act generally prohibits injunctions against the IRS, and the Browns showed no applicable exception.

The Browns’ response to the motion for entry of decision and motion for order to show cause includes issues they call “new matter” – a term drawn from Tax Court Rule 142(a). That Rule, however, actually concerns the burden of proof on “any new matter” raised by the IRS Commissioner beyond what the IRS asserted in their notice of deficiency. The Browns did not allege that the Commissioner actually asserted new issues. (In fact, the Commissioner was proposing to concede the 2015 issues in full.) What the Browns call “new matter” is likely a rehashing or elaboration of previous allegations and not issues relating to the 2015 tax year.

The Court determined that the IRS concession for tax year 2015 means there is nothing further to be decided. The IRS motion to quash the subpoena will be granted because it is moot; additionally, it is improper due to overbreadth concerning tax year 2014, for failure to proffer the required witness and mileage fees, and for demanding production somewhere other than the courtroom at the trial session. The Browns’ motion for order to show cause is moot and it proposes a stipulation that is overbroad.

The Court denied the Browns’ motion for order to show cause and granted the IRS motion to quash the subpoena and motion for entry of decision. As a result, there is no deficiency of income tax due from and no refund due to the petitioners for tax year 2015.

Takeaway: Know your audience and pay attention when the Tax Court explains items like jurisdiction and tax procedure to you.

First, the Browns did not understand which IRS notices bring eligibility for filing a petition with the Tax Court. Second, the Browns did not realize when to drop the issues related to the 2014 tax year. Third, do not take items from Tax Court rules and use them without understanding their meaning or context. Fourth, they brought in several issues that did not relate to the case or that were outside the Tax Court’s jurisdiction. I realize the Browns were unrepresented so that excuses some of their ignorance, but they really needed someone to keep them on track. I have a feeling the positive results they gained for tax year 2015 came about despite their efforts.

Designated Orders: Too Little, Too Late (3/18/19 to 3/22/19), Part One

The five designated orders for this week presented a series of petitioner issues. Generally, they fall into categories where the petitioner either did too little, too much, or was too late. In an interesting twist, two of the cases deal with a petitioner’s filing a motion to vacate or revise a decision under Rule 162.


Too Little
Docket No. 4965-18S, Christopher J. Bard v. C.I.R., available here.

The petitioner, a Chicago police officer, was self-represented in the petition he filed with the Tax Court. The petitioner was not active in his case so the IRS filed a Motion to Dismiss for Failure to Properly Prosecute on February 12, 2019. The Court entered and served its Order of Dismissal and Decision on February 28. That order granted the IRS motion, dismissed the case, and entered a decision in favor of the IRS deficiency and penalty determinations in the notice of deficiency.

On March 19, 2019, petitioner filed a Motion To Vacate Or Revise Pursuant to Rule 162. He states he “was completely shocked when he recently discovered that his case had been dismissed” because, “based on a misunderstanding and miscommunication with his tax return preparer, an enrolled agent,” he “mistakenly believed that his only obligation with respect to this tax court case was to file the petition at the beginning of the case and to do nothing more.”

Oh, really?

The judge begins with the Notice Setting Case For Trial, which set the case for calendar call at 10:00 a.m. on Monday, February 25, 2019. Within the notice it states that “the parties are expected to be present and to be prepared to try the case” and “failure to appear may result in dismissal of the case and entry of decision against you.” Within the notice, it guides petitioners to the Tax Court website and Judge Armen describes some of the assistance available there for self-represented petitioners. At the end of the notice, it states again, that “failure to cooperate may also result in dismissal of the case and entry of decision against you” (emphasis in the original).

The Court sent another notice of trial on January 29, 2019 reminding the parties of the time, date, and place of the trial session. In that notice, there is another warning that failure to appear may lead to dismissal of the case. The remaining two paragraphs are directed to self-represented taxpayers to assist with navigating the trial process, including how to seek assistance from a tax clinic.

When the IRS filed its Motion To Dismiss For Failure To Properly Prosecute, they provided details regarding communications with the petitioner. The following are listed in the order: (a) A letter from IRS Appeals regarding substantiation of disallowed Schedule A deductions provoked an insufficient response by petitioner; (b) Petitioner did not respond to a second similar letter from IRS Appeals; (c) IRS counsel left a voicemail at petitioner’s telephone number of record on February 6, 2019, in order to ascertain petitioner’s views and warning him that failure to participate in the case may lead to its dismissal, to which petitioner did not reply; and (d) IRS counsel left the same message on February 8 with the same result. The Court refers to the language in the petitioner’s pending motion to describe his actions – that he ignored all correspondence from the Service relating to the case because he mistakenly believed that his only obligation in Tax Court was to file the petition and do nothing more.

The day after the IRS filed its motion to dismiss (February 13), the Court served an Order that calendared the motion for hearing and included another warning. The entire order is quoted and once again it states that failure to appear may result in dismissal and a decision entered again the petitioner.

When the case was called and recalled from the calendar for the Chicago trial session on February 25, 2019, the petitioner did not appear and no one appeared on his behalf at either time. By contrast, IRS counsel appeared, supported their motion, and stated in response to the Court’s inquiry that there had been no response from the petitioner since filing the motion to dismiss.

In Judge Armen’s conclusion, he summarizes the issues with the petitioner’s motion. The petitioner “received multiple warnings from the Court about the need to appear in court” and the consequences for failing to appear (emphasis in original). The petitioner was warned by the Court and the IRS regarding the consequences for failing to cooperate in preparation of the case for trial (also emphasized in the original). The notices were not in “legalese” or arcane language, but were clear, concise, written in plain English, and easily understood by a reasonable person so petitioner’s alleged belief his only obligation was to file the petition and do nothing more struck the Court as disingenuous. Also, a police officer would know what to do when a court says to a party in a judicial proceeding that the party is supposed to show up. The judge states that the petitioner did not show up and did not offer any reason to excuse his failure to do so, plus the motion fails to offer a convincing reason justifying his failure to appear. The petitioner’s motion was denied.

Takeaway: This is a thorough review of the Tax Court’s efforts to notify petitioners regarding the necessity to participate in the Tax Court process and the consequences of failure to do so. I would agree that a police officer, while not a legal expert, should know it is necessary to appear in court when the court says you need to be there.

Judge Armen did not address the elements of Rule 162 in his order because, frankly, the petitioner’s actions did not even rise to the level where that should be analyzed. Instead, he focused on how the petitioner was warned to be active in his Tax Court case and was not.

• Docket No. 12070-18 L, Janine P. Antoine v. C.I.R., available here. The petitioner did not do anything after filing Form 12153 for a Collection Due Process hearing such as accept the settlement officer’s offer of a telephone conference or submit supporting documents. Following the Notice of Determination, the petitioner filed a petition with Tax Court. The IRS filed a motion for summary judgment and the petitioner filed a one-paragraph notice of objection with a statement that “there is a dispute between the parties in regard to withholdings” without elaborating or submitting supporting documents. The Court granted the IRS motion.

• Docket No. 4472-18 L, Richard Conant Giller v. C.I.R., available here. Petitioner did not respond to the settlement officer’s document requests in the 5 letters sent to him based on his Collection Due Process hearing requests. The IRS Notice of Determination led to the petitioner filing with the Tax Court for tax years 2011, 2013 and 2015. At trial, petitioner conceded issues with respect to 2013 and 2015. Concerning 2011, petitioner asserted he filed a Form 1040 for 2011 and the substitute for return prepared by the IRS was invalid. The evidence presented by petitioner shows his Form 1040 was not processed by the IRS because it lacked his wife’s signature. Also, the TurboTax materials petitioner offered state in two different places that “you can still file electronically” so they also indicate he never completed the electronic filing of his tax return. Petitioner’s evidence and the IRS transcripts did not indicate the 2011 tax return had been filed by petitioner. Decision was entered for the IRS that there was no abuse of discretion and that they may proceed with the proposed collection action.

Too Late
Docket No. 30082-14SL, Victor M. Crown v. C.I.R., available here.

Following a trial in this case, the Tax Court issued a Summary Opinion, and on April 5, 2016, entered an Order of Dismissal and Decision. Petitioner filed a motion to vacate or revise the decision on March 18, 2019. Here, Judge Guy analyzes Rule 162 and how it applies to the petitioner’s case.

Pursuant to Tax Court Rule 162, a motion to vacate or revise a decision must be filed within 30 days after the decision is entered, unless the Court allows otherwise. The Court generally cannot consider a motion to vacate that is filed after a decision becomes final. IRC section 7481(a)(1) provides the rule that a decision of the Tax Court becomes final on expiration of the time to file a notice of appeal. Section 7483 provides a notice of appeal generally must be filed within 90 days after a decision is entered.

There are exceptions for narrowly circumscribed situations such as that the Court may vacate or revise a final decision if (1) the decision is shown to be void, or a legal nullity, for lack of jurisdiction over the subject matter or the party, (2) the decision was obtained through fraud on the Court, or (3) there is a need to correct a clerical error in the decision.

Since the petitioner did not establish any of those exceptions to the finality of the decision in the case, the Court lacked jurisdiction to vacate the Order of Dismissal and Decision entered April 5, 2016. The Court therefore denied the petitioner’s motion to vacate or revise the decision.

Takeaway: I could understand being late on filing the motion, especially for a petitioner that is ignorant of the Tax Court Rules. To wait nearly 3 years and file the motion is unreal. The Tax Court will not wait for the petitioner who needs years to respond.

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.


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.


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.


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.


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.