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

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

Routine Collection Due Process

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

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

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

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Foreign Bank Records

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

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

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

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

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

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

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

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

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

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

Discovery Requests and Responses

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

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

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

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

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

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

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

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

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

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

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

Petitioners Needing Filing Help

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

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

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

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

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

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

Missing the Mark

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

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

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

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

Has the Statute of Limitations Run?

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

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

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

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

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

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

Penalties for the Taxpayer?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Serving Subpoenas

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

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

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

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

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

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

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

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

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

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

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

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

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

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Collection Due Process Case 1

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

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

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

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

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

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

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

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

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

Collection Due Process Case 2

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

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

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

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

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

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

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

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

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

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

Premium Tax Credit Bench Opinion

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tax Court Tips From Judge Vasquez

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

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

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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.