Catching Up with Designated Orders, 2-10 to 2-14-20

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In the past few months, there have been some developments that are, dare I say, more important than the Tax Court’s designated orders. As such, I’ve prioritized those. Now that I’ve finally found some time, I have written on designated orders for the past few months. Here is the first in a series of posts. 

This week, most of the others are in CDP cases. Below, I highlight two CDP cases, including one case (Chau) where I’d like to have seen the Court deal more squarely with the question of whether the taxpayer waived an issue for review by failing to raise it in the CDP hearing. Another case discusses the taxation of Social Security benefits received by non-residents. 

Other designated orders for this week included:

  • An order from Judge Carluzzo granting Respondent’s motion for summary judgment in a CDP case where Petitioner didn’t provide financial information during the CDP hearing.
  • Another order from Judge Carluzzo in a CDP lien case, granting summary judgment where Petitioner failed to participate in the CDP hearing.
  • An order from Judge Gustafson granting Respondent partial summary judgment on whether a purported conservation easement failed the perpetuity requirement under section 170(h)(5)(A).
  • An order from Judge Gale granting a motion for summary judgment in a CDP case, in addition to imposing a $500 fine for frivolous arguments under section 6673.
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Docket No. 24671-18L, Sneeds Farm, Inc. v. C.I.R. (Order Here)

In the Clinic, I always stress the need to conduct a searching financial analysis before considering any particular collection alternative. Only from there can we proceed to see which options are feasible, and from those, select among those options in light of our clients’ priorities, values, and interests. Sometimes, the financial information isn’t “good”, relative to what would qualify the taxpayer for an Offer in Compromise or affordable installment agreement. In those situations, we need to consider other options, including presenting non-financial hardship information to the IRS. Those are tricky cases, because we must convince an IRS official to exercise their discretion.  

This case before Judge Carluzzo seems to be one I never would have brought before the IRS—at least not without significant facts that demonstrated some sort of hardship beyond these raw numbers.

Respondent filed a motion for summary judgment against Petitioner in this CDP case. The taxpayer had a liability of about $110,000 and had proposed to Appeals an installment agreement of $5,000 per month. Not a terribly bad deal for the IRS; such an agreement should pay off the liability in just over two years.

Nevertheless, because the liability was so high, this taxpayer didn’t qualify for a streamlined installment agreement, where the payment can be spread over 72 months. See IRM 5.14.5, Streamlined, Guaranteed, and In-Business Trust Fund Installment Agreements. Thus, the taxpayer was relegated to a payment based upon its financial circumstances. Unfortunately, the taxpayer apparently owned property with a net value of over $5 million—more than enough to satisfy the outstanding liability. Appeals rejected the proposed IA and issued a Notice of Determination, because the taxpayer wouldn’t explore the idea of selling the property or using it as collateral to obtain financing.

Of course, that’s not the end of the story. Perhaps there would be good reasons to not sell the property, such as if the property (as might be the case here based on Petitioner’s name) might be the very “farm” that gives this business taxpayer its raison d’etre.  Perhaps the taxpayer couldn’t obtain financing to pay off the liability.

If those issues existed, they don’t appear to have been presented to Appeals, let alone to the Tax Court. And because it’s well established that the Tax Court may sustain Appeals’ decision to proceed with collections where the taxpayer has sufficient assets to fully pay the liability, Judge Carluzzo has no trouble granting summary judgment to Respondent.

Docket No. 13579-19SL, Chau v. C.I.R. (Order Here)

CDP Week continues with this order from Judge Panuthos on Respondent’s motion for summary judgment in this CDP lien case. All the liabilities at issue are joint liabilities of former spouses. While the case is captioned only in the name of the Petitioner-husband, Mr. Chau, Judge Panuthos clarifies that both spouses signed the Tax Court petition and the lien notices were issued for joint liabilities.  

This order interests me because it seems to remand the case back to Appeals to consider an issue not raised at the Appeals hearing: Petitioner-wife’s request for Innocent Spouse relief. The petition mentioned that Ms. Nguyen was attempting to file an innocent spouse claim. But the Court doesn’t make reference to this request appearing in the Appeals hearing or in the written correspondence to Collections or Appeals in conjunction with the CDP hearing.

This would seem to raise the specter of waiver; if a taxpayer fails to raise an issue in the CDP hearing, the Tax Court generally “does not have authority to consider section 6330(c)(2) issues that were not raised before the Appeals Office.” Giamelli v. Comm’r, 129 T.C. 107, 115 (2007). Judge Panuthos does note in the Order that Respondent did not respond to the Innocent Spouse issue raised in the petition; but the petition in response to the Notice of Determination isn’t the Appeals hearing. Of course, as we can’t review the underlying summary judgment motion, I cannot speculate on whether Respondent independently raised the waiver issue.

In any event, Judge Panuthos ends up denying the motion for summary judgment and remands the case to IRS Appeals for consideration of the Innocent Spouse claim. I think it would have been helpful to deal squarely with the waiver issue in this order, even though this is designated as a small case, and thus not appealable or precedential.

Taxation of SS for NRAs: Docket No. 6641-18, Thomas v. C.I.R. (Order Here)

Finally, a relatively uncomplicated order on the taxation of Social Security received by nonresident aliens. How might a nonresident alien be entitled to Social Security benefits in the first instance? In this instance, Petitioner is the survivor of her U.S. citizen husband, and was therefore entitled to receive Social Security survivor benefits.

The general rule for non-resident aliens (which I did not know before reading this order) is that 85% of Social Security benefits received are taxed at a 30% rate. I.R.C. §§ 861(a)(8); 871(a)(3). And because Social Security benefits are not effectively connected with U.S. sourced income, no itemized or other deductions may offset the taxation of these benefits.

Most taxpayers are unlikely to wind up before Tax Court regarding such a dispute, because the Social Security Administration must also withhold that 30% from Social Security payments to nonresidents. Indeed, Petitioner’s case is the only case that appears in the Orders Search function on the Tax Court’s website when restricting the search to “861(a)”. But, somehow, Petitioner filed a tax return and received a refund of the withholding payments, eventually catching the eye of the IRS.

Section 861 also isn’t the end of the inquiry for many taxpayers. Practitioners must consult the relevant income tax treaties when researching the taxation of nonresident aliens. In this case, the United States-Trinidad and Tobago Income Tax Convention of 1970 makes no special provision for Social Security payments. Thus, the general rules of sections 861 and 871 apply. Note that the IRS helpfully summarizes the various income tax treaties’ taxation of various forms of income in this document.

About Patrick Thomas

Patrick W. Thomas is the founding director of Notre Dame Law School’s Tax Clinic, in which he trains and supervises law students representing low-income clients in disputes with the Internal Revenue Service. Prior to joining the law school faculty in 2016, he received an ABA Tax Section Public Service Fellowship to work as a staff attorney for the LITC at the Neighborhood Christian Legal Clinic in Indianapolis.

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