Trust Fund Recovery Penalty Case Wins a Remand in Prior Opportunity CDP case

In the case of Barnhill v. Commissioner, 155 T.C. 1 (2020) the Tax Court determined that the taxpayer never received the letter from the IRS scheduling the conference to dispute the Trust Fund Recovery Penalty (TFRP).  Because the taxpayer did not receive that letter, the taxpayer did not have a prior opportunity to dispute the merits of the TFRP.  Because the Settlement Officer in the Collection Due Process case refused to hear the merits of the TFRP based on the position that the taxpayer had a prior opportunity to dispute the TFRP in Appeals, the Tax Court remanded the case to Appeals to give the taxpayer an opportunity to contest the merits.  Bryan Camp wrote an excellent post on this case which you may want to read instead of this one, but I will try to cover slightly different ground.

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The Barnhill case arose in Richmond, Virginia.  I had lunch with Mr. Barnhill’s attorney not long after the opinion was issued.  He indicated that after the opinion, the parties reached a basis for settlement and described the settlement to me.  The Tax Court docket sheet does not yet reflect a settlement but sometimes the settlement of a case can move slowly and particularly now.  The settlement shows the benefit of CDP in a way that we do not talk about often and the prior opportunity aspect of this case stands in contrast to another TFRP case involving prior opportunity now pending before the 4th Circuit.

Mr. Barnhill requested a hearing with Appeals to talk about the imposition of the TFRP against him.  He felt and his ultimate settlement suggests that the TFRP proposed against him was too high.  For reasons unknown he did not receive the invitation to the hearing offered by Appeals.  Because he did not respond to the offer of the hearing, Appeals quite rightly recommended the assessment move forward, which led to the filing of the notice of federal tax lien which led to his request for a CDP hearing. 

Because this is a TFRP case with a divisible tax at issue, Mr. Barnhill had a way to get into court to contest the liability without having to full pay the liability.  He did not face the same mountain of full payment faced by Lavar Taylor’s clients who tried without success to use CDP to resolve the merits of their tax liability as we discussed here, here and here.  Even without the full payment barrier, however, litigation in district court costs much more than litigation in Tax Court in almost every case and certainly more than an administrative hearing.  CDP offered him the chance to have his administrative hearing that he missed.  Once he missed the pre-assessment administrative hearing with Appeals, CDP provided, by far, the cheapest way for him to resolve his dispute over the liability.  It also provided the cheapest way for the IRS to resolve the dispute.

Not every taxpayer has a meritorious argument that the assessed amount overstates the correct liability.  I understand the desire to limit the use of Appeals resources and Counsel resources if a high percentage of cases seeking a merits review lack any merit.  I have no empirical evidence but do not believe that the majority of cases seeking a merits adjustment lack a basis for such an adjustment.  The IRS does taxpayers, and in many cases itself, a disservice by imposing regulations that limit the opportunity to come into Appeals in the CDP context and limit the opportunity to litigate in Tax Court.  Viewed through the lens of taxpayer rights, it has regulations that do not provide taxpayers with their full rights.  This is particularly true in cases with high dollar assessable, non-divisible penalties, but also applies in situations where a simple administrative visit could resolve a matter that otherwise requires expensive district court litigation.

Assuming the information provided to me that the Barnhill case has settled for an amount substantially lower than the assessed amount is correct, the case stands as an example of the benefit of CDP merits opportunities.  Instead of working hard to limit those opportunities, the IRS should reexamine its regulations, perhaps armed with empirical evidence I do not have, and create a better system than exists today.

This leads to the contrast between what has happened in Barnhill and what happened in a CDP case stemming from an Automated Underreporter assessessment, the Zhang case.  Zhang was decided by designated order rather than precedential opinion and was blogged by Caleb Smith here.  Like Mr. Barnhill, Mr. Zhang did not have a pre-assessment hearing with Appeals and sought to raise the merits of his assessment in a CDP case.  The facts in the Zhang case, however, differed slightly and that difference caused the Tax Court to deny him the opportunity to go back to Appeals to work out the issue.  As a result, he decided to take his case into the 4th Circuit (docket no. 20-01453) rather than to start over through the refund route (a route still theoretically open to him should he lose on appeal.)

Among other things, the Zhang case reinforces the importance of the Tax Court’s orders.  While the Barnhill case ends up as a precedential opinion, the Zhang case flies under the radar as an order, albeit a designated one.  In Mr. Zhang’s case he alleges that he did not receive the statutory notice of deficiency.  In most cases, but see the discussion on Landers here, that would afford Mr. Zhang the opportunity to have a hearing with Appeals regarding the merits of the assessment.  Mr. Zhang made a timely CDP request after receiving a notice of intent to levy and asked to discuss the merits of the assessment; however, the individual in Appeals handling his case for some reason did not consider the merits.  The Tax Court seemed to acknowledge that the Appeals mishandled this CDP hearing; however, Mr. Zhang did not petition the Tax Court after receiving the determination letter in this case.

He later received a notice of federal tax lien which caused him to file another CDP request.  He again sought to raise the merits of the assessment.  Here, he gets caught in a Catch-22 situation.  Appeals says maybe we should have listened to you last time, but that time serves as a prior opportunity and it’s too late to raise the merits now.  The Tax Court agreed with Appeals on this point.  The 4th Circuit will have an opportunity to rule on the outcome.

IRS – is this what you want?  Your mistake led the pro se Mr. Zhang to the wrong place and now you are arguing that because the pro se Mr. Zhang did not appeal your mistake he is out of luck on having a prepayment forum to fix his liability.  Yes, he could try audit reconsideration but why make him do that?  His case is an AUR case.  It should be relatively easy to determine if you agree.  Here is the maddening part of prior opportunity, and the game the IRS wants to play with it.  Let’s figure out a way to resolve these cases at the administrative level and not force people into court unnecessarily, particularly when the mistake started with the agency and not the individual.

Mr. Barnhill’s result shows the redeeming feature of CDP.  Mr. Zhang’s case shows the maddening aspect of how it is administered in some cases.  We can make it better.

Timely Requesting a CDP Hearing

Today we celebrate the 7th anniversary of procedurally taxing.  As we have mentioned before, the idea of the blog was the brainchild of Les Book.  Les, Steve and I were, and are, working on the treatise “IRS Practice and Procedure” that Les edits.  From the work we did keeping that treatise updated we decided to put up occasional posts on the new blog site.  From rather modest expectations the blog has grown well beyond our vision of the blog in 2013.  Thank you for joining us in talking, writing and thinking about tax procedure and trying to improve the way we navigate the tax system.  The blog is approaching 3000 subscribers.  Because of tax procedure issues raised by the pandemic, the blog has had many more visits in 2020 than any previous year.

In SBSE-05-0720-0049 the IRS announces changes to IRM 5.1.9.3.2 regarding the receipt of a request for a CDP hearing.  The changes result from Chief Counsel technical advice memorandum PMTA-2020-02, dated December 12, 2019.  The changes in the IRM take a narrow view of the timeliness of request for a CDP hearing and leave out broader issues of jurisdiction as well as of best practices.

We have discussed this issue previously here, here, here and here.  I wrote an article about this issue in Tax Notes in November of 2018 available here

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At one point the IRS took the position that in order to timely request a CDP hearing, the taxpayer had to mail the request to the proper address for requesting a CDP hearing as listed in the CDP notice.  One of the problems with this position stemmed from the CDP notice, which generally contained two or more addresses.  Because the CDP notice serves as much or more as a collection notice demanding payment as it does as a notice of legal rights to a hearing, the notice featured an address where the recipient could mail their payment.  Taxpayers regularly mailed their CDP request to the office listed for mailing payment instead of the office listed for sending the request as discussed here.  Although IRS employees were instructed to quickly resend the request to the appropriate office, this did not always happen.  When the notice reached the correct office after the 30-day period, the IRS argued that the taxpayer should receive only an equivalent hearing.

The PMTA and the changes to the IRM reflect a relaxation of the rule regarding receipt and allow as a timely request the mailing to any address on the CDP notice with a postmark by the 30th day after the notice.  This IRM provision, however, adheres to the narrowest interpretation of the PMTA.  It’s a good first step, but many taxpayers will send their requests to some other address or send it after the 30 days while having a good excuse.  The IRM also allows as timely CDP requests those requests that taxpayers timely fax to a fax number when the CDP request form provides such a number.

Taxpayers should make every effort to mail or fax their CDP request to the proper address or fax number on the CDP notice; however, if the CDP request did not get sent to an address or fax number on the CDP notice by the 30th day, the taxpayer should still consider arguing a timely mailed or faxed notice to the IRS should trigger a CDP hearing rather than an equivalent hearing.  Because the timely CDP request provides one step in the path to jurisdiction of the Tax Court in a CDP petition, the taxpayer should consider making equitable tolling arguments in appropriate circumstances.

The new IRM provisions will allow taxpayers who timely mail their CDP request to an address on the CDP notice; however, we know that many additional permutations exist that could cause late receipt of a CDP request by the IRS.  Because the making of a late CDP request to the IRS should not create a jurisdictional basis for barring a CDP hearing, taxpayers with a good excuse for lateness should seek to preserve their right to a CDP hearing by explaining to the IRS the reason for the late submission of the CDP request.  If the IRS persists in denying a CDP hearing and issues a decision letter rather than a determination letter, the taxpayer should file a petition with the Tax Court within 30 days of the decision letter seeking a determination from the Tax Court regarding the timeliness of the CDP request.  Assuming that the Tax Court agrees with the basis for the late CDP request, the Tax Court can determine that the taxpayer has met the criteria for making a CDP request and remand the case to Appeals for a CDP hearing.

The recent change to the IRS offers a good first step toward improvement of the process of obtaining a CDP hearing.  Taxpayers should continue pushing to make the process even better.

A Webber Update, Possible Pandemic Changes, and Conservation Easements: Designated Orders 5/11/20 to 5/15/20 and 6/8/20 to 6/12/20

There were 7 designated orders during the week I monitored in May and 1 designated order for the week I monitored in June (Mark Alan Staples order), covering a variety of topics.  We start with an order updating the Webber case and its Collection Due Process issues.  Next, is there a change in the Tax Court treatment of motions to dismiss during the COVID-19 pandemic?  Following that, there are conservation easement, innocent spouse and other cases to review.

A Webber Update

Docket No. 14307-18 L, Scott Allan Webber v. C.I.R., Order available here.

Previously in Procedurally Taxing, the Webber case prompted discussion and change regarding Collection Due Process (CDP) and jurisdiction in Tax Court.  I wrote here regarding the case and Judge Gustafson’s taking issue with a prior IRS motion to dismiss.  The motion to dismiss was based on an IRS notice concerning CDP rights that had 2 addresses listed, one to request a CDP hearing and the other to make payment to the IRS on the listed amount due.  Mr. Webber had attempted to submit his CDP hearing request, but wound up mailing it to the payment address by mistake.  Based on the request’s movement through the IRS bureaucracy, it arrived at the correct location but late enough to only allow Mr. Webber an equivalent hearing (limiting his access to Tax Court review).  After Judge Gustafson took the IRS to task on the motion to dismiss as being a harsh result for such a simple taxpayer mistake, the IRS withdrew their motion to dismiss.  Things were not done regarding CDP, though, as there was a CDP Summit Initiative Workshop where these types of issues with CDP notices were discussed (also here).  Keith wrote here that a result of this discussion led to a program manager technical assistant (PMTA) memo setting new IRS policy to determine timeliness of a CDP hearing request.  The new policy is based on the type of situation above – receipt of a CDP hearing request at an incorrect office when it was mailed to the incorrect office because of being an office listed on the notice. 

I would like to also announce that the IRS is making a revision to the Internal Revenue Manual at IRM 8.22.5.3 to reflect that PMTA memo.  The revision will be effective beginning July 6 and will be incorporated into the IRM within 2 years of the date of this memorandum, reflected here (this links to a Tax Notes article available only to subscribers). 

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Got that?  Because the current designated order has a change of topic.  This designated order’s topic is shift from jurisdiction to the topic of credit elects.

In fact, Mr. Webber is dealing with a credit elect dating back to 2003 (when it was $71,012).  Over the years, that credit elect was applied to each tax year until we are dealing with the tax year at issue and the question of whether a credit elect of $77,782 from 2012 applies to his 2013 tax return.  If so, it reduces his 2013 total tax of $5,690 so that there is a credit elect of $72,092 that would carry to the 2014 tax return.

The problem is that Mr. Webber has received conflicting messages from the IRS regarding allowance of the credit elect over the years.  Certainly, removing an earlier link in the chain of credit elects would affect the 2013 tax year.  Part of the problem is that the review by Appeals during his CDP hearing was not honoring a prior IRS letter allowing the credit elect for tax years 2004 and 2005.

This order deals with both an IRS motion for summary judgment and Mr. Webber’s response, which contains a motion to dismiss and a motion to remand.

Mr. Webber presents the issue raised, the availability of the credit elect for tax year 2013, as a challenge to the existence of an underlying liability.  He contends that no valid CDP hearing was conducted asking to dismiss for lack of jurisdiction, but also asking for a remand back to Appeals for them to take appropriate action.  The judge finds dismissal for lack of jurisdiction to be unwarranted.  Regarding remand, Judge Gustafson says it may or may not be necessary based on the IRS argument concerning the credit elect issue in the CDP hearing so no remand at this time.  Both motions are denied (the motion to remand denied without prejudice).

While the Court is not adjudicating Mr. Webber’s entitlement to the overpayment underlying the credit elect in 2013, the Court does have the responsibility to determine if the IRS allowed the overpayment but failed to credit it.  The Court states that is a genuine dispute of material fact since Appeals gave a statement in 2012 that they are allowing the full amount of the claimed credit elect for 2004 and 2005.  Appeals stated in the more recent CDP hearing that the question needed to be resolved outside Appeals so the Court reviews possible reasoning (statute of limitations, non-determination years, or refunds received).  None of that is conclusive so there is a genuine dispute of fact, leading to denial of the motion for summary judgment.  The parties are currently filing joint status reports to the Court.

Bob Kamman wanted to let us know about some coincidences – there is a citation in this order to a published Tax Court opinion from 2012 that also involves a credit-elect dispute in a CDP context.  The taxpayer is named Hershal Weber and the opinion was written by Judge Gustafson.  The more things change, the more they stay the same?

Stance on Motions to Dismiss During Pandemic?

Docket No. 10386-19S, Salvador Vazquez, v. C.I.R., Order available here.

This order is rather short, but notable.  The order begins by stating this case was scheduled for the Los Angeles trial session beginning June 1 before COVID-19 disrupted the Tax Court calendars.  The IRS filed a motion to dismiss for failure to properly prosecute on May 6, stating that the petitioner failed to respond to numerous attempts by the IRS to make contact.

Judge Carluzzo states:  “Under the circumstances and at this stage of the proceedings, we are reluctant to impose the harsh sanction that respondent requests. Our reluctance, however, to impose the sanction at this time in this case should not in any way be taken as a suggestion that a party’s behavior, as petitioner’s behavior is described in respondent’s motion, could not support such a sanction under appropriate circumstances.”

It is too soon to tell if this is any type of new position for the Tax Court regarding motions to dismiss during these pandemic times.  Since then, the judge ordered the parties to, separately or together, submit reports by August 24.

Conservation Easements

In recent years, the IRS has been taking a harder stance against several organizations that have claimed deductions for the donations of conservation easements.  For those looking to learn more about the issues, I recommend listening to two of the June 2020 podcast episodes from Tax Notes Talk.  A problem I have noticed is that both the bad apples and the good ones have been swept up in the IRS enforcement efforts.  For example, a request I have seen from the good apples is that they would like to get sample language from the IRS on how to draft documents relating to the conservation easement donation that will be satisfactory to the IRS.

One current development regarding conservation easement cases is that the IRS announced in IR-2020-130 that certain taxpayers with syndicated conservation easement issues will receive letters regarding time-limited settlement offers in docketed Tax Court cases.  Perhaps that will help reduce the conservation easement cases on Tax Court dockets.

  • Docket No. 5444-13, Oakbrook Land Holdings, LLC, William Duane Horton, Tax Matters Partner v. C.I.R., Order available here.

Oakbrook Land Holdings would like to reopen the record to add four deeds from the Nature Conservancy that have language to support the argument that Oakbrook’s deed doesn’t violate the regulation regarding their conservation easement donation.  The Court ruled the evidence is merely cumulative.  Also, the Conservancy’s comments, not practices, are what is discussed so the proffered deeds won’t change the outcome of the case.  The motion to supplement the record is denied.

  • Docket No. 10896-17, Highpoint Holdings, LLC, High Point Land Manager, LLC, Tax Matters Partner, v. C.I.R., Order available here.

This case required a look to state law in Tennessee regarding interpretation of the deed at issue and that does not help Highpoint Holdings.  The IRS motion for partial summary judgment is granted and the parties are to submit their status reports on how to proceed in the case.

Innocent Spouse

Docket No. 4899-18, Doris Ann Whitaker v. C.I.R., Order available here.

This is an innocent spouse case that came to Tax Court as Ms. Whitaker is seeking relief from joint liability for 2005 income tax, pursuant to IRC 6015(f).  Ms. Whitaker has not completed high school and is employed as a nurse’s aide.  When filing the 2005 tax return, income attributable to her then-disabled and drug-addicted husband was not reported on the return.  Ms. Whitaker did not report his income as she incorrectly understood “married filing jointly” to mean “married filing separately”.  Basically, she thought filing the joint return took care of her obligations and her husband was required to file his own separate return.

The IRS filed their motion for summary judgment, arguing “there remains no genuine issue of material fact for trial”.  The Court, when reviewing the facts and circumstances, takes Ms. Whitaker’s education and resources into account and finds this factor is sufficient to prompt a holding that there is a genuine issue of material fact to prompt denial of the motion without prejudice.

However, what to make of the recent amendment to IRC 6015(e)(7)?  The amendment requires the Tax Court to review applicable innocent spouse cases based on (A) the administrative record established at the time of the determination, and (B) any additional newly discovered or previously unavailable evidence.  What should be done with motions for summary judgment in conjunction with these evidentiary requirements?  In this case, only the IRS motion is on hand.  The Court has the discretion to construe an opposition to a summary judgment motion as a cross-motion for summary judgment but only where the parties have adequate notice and adequate opportunity to respond.  There was no such notice to treat Ms. Whitaker’s opposition as a cross-motion.  The Court orders the parties to communicate toward settlement.  The next order is for the IRS to file a certified administrative record and motion for summary judgment based on that record.  Ms. Whitaker is ordered to file any objections she would have about the administrative record, a response to the motion and a cross-motion for summary judgment.  The Clerk of the Court is also ordered to serve on Ms. Whitaker a copy of the information letter regarding the local Low Income Taxpayer Clinics potentially providing assistance to her (this case is being worked by Winston-Salem IRS Counsel so presumably this would be the 2 North Carolina clinics).

There have been subsequent orders filed in this case.  The first order relays that in a telephone conference between the parties that the IRS is conceding the IRC 6015 issue in the case so the parties are ordered to file a proposed stipulated decision or joint status report no later than July 17.  The second order relays that the IRS filed a motion for entry of decision on June 24, proposing a zero deficiency and no penalty due for the 2005 tax year, after applying IRC section 6015(b), and there is no overpayment in income tax due to petitioner for the 2005 tax year.  However, the motion states that the petitioner objects so Ms. Whitaker is to file no later than July 24 a response to the motion explaining why it should not be granted and a decision should be entered in this case.

Unless there is a procedural issue in her case I am overlooking, I find this to be a win for Ms. Whitaker and think she should not file a response to the motion.

Short Takes on Issues

  • Docket No. 6946-19SL, Soccer Garage, Inc., v. C.I.R., Order available here.

This case concerns Collection Due Process regarding a levy and penalties for failure to file.  The IRS argues there was an intentional disregard of the filing requirement.  There are not enough facts provided regarding the petitioner’s intent so the Court denied the IRS motion for summary judgment.

  • Docket No. 10662-19W, Wade H. Horsey v. C.I.R., Order available here.

Mr. Hosey requested the reconsideration of the determination of a whistleblower claim and his motion was denied.

  • Docket No. 6560-18, Mark Alan Staples v. C.I.R., Order and Decision available here.

Mr. Staples filed a motion for new trial that the Court had to recharacterize as a motion for reconsideration of findings or opinion.  Mr. Staples made arguments about the characterization of his retirement benefits, Constitutional arguments, and generally argued about his computation regarding tax year 2015.  The Court denied the motion as the IRS computations were in line with the Court’s memorandum findings of fact and opinion.  On this case, I am generally confused by the petitioner’s actions – was he a tax protestor or just ignorant of tax procedure?  Either way, his motion was filed in vain.

 

Spousal Support Agreements in Collections Analysis – Designated Orders – March 30 – April 3, 2020

This week is somewhat light, but one order from Judge Panuthos in a CDP case breaks new ground. Additionally, the Court continues to make accommodations due to the fallout from the COVID-19 pandemic; Judge Gale and Petitioners’ counsel had to figure out how to accommodate a document that couldn’t be e-filed while the Court’s mailroom was shut down. I cover this issue in a separate post here.

The other major order came in Cannon Corp. v. Commissioner, where Judge Holmes denied summary judgment for Respondent in a 6751 penalty approval case. Keith previously covered this order here. Take a look at Keith’s post for details on this order from Judge Holmes (another order that I, again, must question why it doesn’t appear in an opinion).

Judge Kerrigan also issued an order granting Respondent’s motion for entry of decision where Petitioner tried to unwind previously filed stipulations.

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Docket No. 11337-19L, Behn v. C.I.R. (Order Here)

Judge Panuthos’s order in Behn breaks, I think, some new ground on what expenses Appeals might permissibly consider in crafting a collection alternative for a taxpayer who cannot afford to pay their outstanding liability in full.  The procedural background here is somewhat complex—only one year is properly before the Tax Court, but the Petitioner owes on 12 different tax years (some of which were previously resolved in a CDP case in the Tax Court by placing Petitioner’s accounts into currently not collectible status).

Here again, Petitioner received a Notice of Intent to Levy for multiple tax years and requested a CDP hearing. With the Form 12153, Petitioner included a direct debit installment agreement request, with a proposed monthly payment of $300. Petitioner participated in the telephone hearing that the Settlement Officer scheduled, but didn’t submit financial information ahead of the hearing. Nevertheless, the SO determined that he qualified to claim nearly $1,800 in monthly expenses. Set against his $4,300 in monthly pension income, this left him about $2,500 in net monthly income—far more than the $300 per month he’d proposed.

However, Petitioner raised in the CDP hearing the $1,800 per month he pays his spouse in “spousal support.” But there was no court order mandating this payment, which the IRS requires when proving monthly child support or spousal support payments, see I.R.M. 5.15.1.11 (“If alimony and child support payments are court ordered and being paid, they are allowable.”). Because of this, the SO stuck with the $2,500 proposed monthly payment, after review from her manager. Ultimately, the SO issued a Notice of Determination upholding the levy, for the reason that Petitioner failed to come into filing compliance for tax year 2012.

Judge Panuthos appears to find the issue of legal liability controlling—not whether the obligation is specified in a written court order. Apparently, under California law, one can potentially be liable for spousal support if the parties agree to provide support. He cites California Family Code § 4302, and the cases of Verdier v. Verdier, 36 Cal. 2d 241, 245 (1950) and In re Caldwell’s Estate, 67 Cal. App. 2d 652 (1945). Both of these cases suggest a court could find that the parties independently established a legally binding support agreement.

However, not all legal obligations qualify as necessary expenses under the Internal Revenue Manual. Credit card and personal loan expenses, for example, are not considered “necessary” and do not offset income, because they represent payment for a previous obligation incurred to buy some other expense (necessary or otherwise). See I.R.M. 5.15.1.11. Of course, those payments would be deemed as necessary under the IRM if a taxpayer fails to make those payments, and an unsecured creditor obtains a court judgment and the court then orders payments. Id. Still, these spousal payments are somewhat different, as they’re not as easily excluded as a policy matter as unsecured debts, given that they represent an independent payment obligation and don’t raise the “double counting” concern that likely excludes unsecured debts under the IRM.  

Even if this expense were included, Petitioner’s net monthly income would still not be reduced to the $300 per month payment he proposed. It would, however, substantially reduce it to about $700 per month. And perhaps that would be agreeable.

Finally, I’ll note too that Judge Panuthos did not issue summary judgment because of the reason stated in the Notice of Determination: that Petitioner had failed to file his 2012 tax return. While not discussed in the order (I also haven’t reviewed Respondent’s motion), 2012 should not be, at this point, required to come into compliance under the Internal Revenue Manual, as the IRS generally only requires the past 6 years to be filed. See I.R.M. 5.1.11.7.1(4). This was also true at the time Appeals issued the Notice of Determination in July 2019, but not at the time of the Appeals hearing itself.

This will certainly be an interesting case to watch when it comes back to the Court.

Docket No. 22864-18, Minnig v. C.I.R. (Order Here)

This relatively uncomplicated bench opinion comes from Judge Kerrigan in a deficiency case. The facts here are simple. The taxpayer earned income reported on a Form W-2, but they filed a federal income tax return that reported $0 of income. So, the IRS issued a notice of deficiency.

Respondent apparently conceded the 6662 penalty and the 6651(a)(2) penalty, but won on the underlying tax liability and 6651(a)(1) penalty for failure to timely file the tax return. Aside from that, this is an easy win for Respondent. Apparently, Petitioner put forth numerous frivolous arguments, both as to the tax liability and the failure to file penalty, which Judge Kerrigan did not substantively address.

I defer to Judge Kerrigan’s view of the case and the situation at trial. But I do wonder if the section 6673 penalty was considered in this case—either by IRS counsel or by the Court.

Ultimately, the opinion does note that Respondent conceded two of the penalties at issue. The section 6651(a)(2) penalty doesn’t seem appropriate in any case; the taxpayer didn’t report anything as “tax on the return”, which is the only thing to which section 6651(a)(2) can apply. Rest assured that if the taxpayer continues to fail to pay, the IRS will swiftly assess the section 6651(a)(3) penalty for failure to pay after notice and demand.

It does not seem like there’s anything immediately wrong with imposing a section 6662(a) penalty for negligence. Indeed, Petitioner’s position seems to rise well above negligence. Perhaps Chief Counsel had a 6751 problem? Although hard to tell from the opinion itself, this might be a reason it would make sense not to impose the 6673 penalty. After all, multiple positions of the Commissioner in the Notice of Deficiency were, in fact, erroneous.

Docket No. 3057-19S, Nixon v. C.I.R. (Order Here)

Our last order comes from Judge Gale on Respondent’s motion to dismiss for lack of jurisdiction as to joint petitioners in a deficiency case.

Prior to filing the Tax Court petition, Mr. Nixon filed a bankruptcy petition. A review of both dockets reveals that Mr. Nixon filed a Chapter 13 petition on January 21, 2019 and filed the Tax Court petition on February 27, 2019, at which time the bankruptcy case was still open. That bankruptcy case was dismissed in October 2019, but Mr. Nixon refiled in November 2019, and that case still remains open.

The automatic stay provision of Bankruptcy Code section 362(a)(8) divests the Tax Court of jurisdiction until the bankruptcy case ends. Specifically, section 362(a)(8) says that “[a bankruptcy petition] operates as a stay . . . of . . . the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability . . . of a debtor who is an individual for a taxable period ending before the date of the [bankruptcy discharge order].”

Such bankruptcy debtors aren’t without recourse, however, in disputing the IRS’s determination in the Notice of Deficiency. The bankruptcy court itself could review determine the taxes owed for the disputed year—though see Bush v. United States, 939 F.3d 839 (7th Cir. 2019) (which Keith covered here)for some significant limitations on when the bankruptcy court might exercise its discretion to do so.

Alternatively, section 6213(f) contemplates this scenario, and provides that the 90 day period within which to petition the Tax Court is tolled from the time the bankruptcy petition is filed until the case is discharged or dismissed, plus 60 days. Helpfully, Judge Gale includes a citation to this corollary provision that for Mr. Nixon’s benefit.

In any case, Mr. Nixon had no ability to commence a case in his own right when he did. So, Respondent filed its motion to dismiss the case as to Mr. Nixon—but not as to Mrs. Nixon, who was not a party to either bankruptcy case. Judge Gale explains the law above and grants Respondent’s motion. He also notes that Mrs. Nixon and Respondent had agreed to settle the case; the stipulated decision reveals the parties settled for a deficiency of $3,000 and $4,500 for 2015 and 2016, respectively. They also agreed that no penalties would be imposed. I don’t have access to the underlying Notice of Deficiency, but this sounds like a reduction to the amounts the IRS proposed.

So, what happens to Mr. Nixon? The IRS cannot assess the amount proposed in the Notice of Deficiency against Mr. Nixon because of (1) the automatic stay and (2) the 6213 prohibition that is now continued under 6213(f). But because the tax is joint and several for a jointly filed return under section 6013(d)(3), and because Mrs. Nixon has agreed to waive the restrictions on assessment under 6213 as to herself, the IRS will assess the settled amount against her.

Let’s say that she pays it, Mr. Nixon agrees with that result, and then doesn’t petition the Tax Court as Judge Gale suggests he could. Could the IRS assess the (likely larger) tax contemplated in the Notice of Deficiency against Mr. Nixon? I think it could. Will it? No. The Service’s policy is to provide the same assessment amount for jointly filed tax returns, even if only one party to the joint assessment invoked the Tax Court’s jurisdiction.

I had a similar case involving a taxpayer’s widow, who did not want to open an estate for the mere purpose of ratifying the petition.  Counsel assured me that the IRS would assess the tax on both accounts based on the Tax Court settlement; that is indeed what occurred.

One interesting counterfactual question: let’s say that Mr. Nixon’s bankruptcy case had concluded by the time the Tax Court was ready to rule on Respondent’s motion to dismiss. Would the Tax Court have allowed Mr. Nixon to ratify the Petition? 

No. The automatic stay bars the ability of a taxpayer to petition the Tax Court in the first instance. Those were also the facts in McClamma v. Commissioner, which Judge Gale cites in his order. The taxpayer would need to file a new petition, within the extended time frame under section 6213(a) & (f).

But what if by the time the motion was ready for review, Mr. Nixon’s time to file the Petition under 6213(f) had expired? Same story. As above, his time to file a petition in the Tax Court would have expired, and the IRS would proceed to assess the tax—albeit in the reduced amount noted above. As readers are aware, the Tax Court has taken a stringent view of its jurisdictional grants and while judges often write that they are “sympathetic” to the taxpayer’s situation, they nevertheless dismiss the case for lack of jurisdiction. Equity plays little role. See, e.g., Zimmerman v. Commissioner, 105 T.C. 220 (1995) (dismissing where the bankruptcy court notified petitioners of the discharge 137 after it was entered—leaving petitioner with only 13 days to file); Drake v. Commissioner, 123 T.C. 320 (2004) (dismissing a standalone innocent spouse case, even though section 6015 lacks a tolling provision similar to section 6213(f)); Prevo v. Commissioner, 123 T.C. 326 (2004) (same for CDP petitions).

Suspension of Collection Statute of Limitations Redux

Les and I have blogged previous cases involving Mr. Weiss here, here and here.  Thanks to sharp eyes by Carl Smith, we get to revisit Mr. Weiss in his continuing, and long lasting, journey along the path to tax compliance.  When we first wrote about Mr. Weiss, he had a Collection Due Process case underway in which he argued that he was purposefully attempting to file an equivalent hearing so that the statute of limitations on collection would run.  The problem he had with the argument stemmed from a difference between the date on the CDP notice and the date of actual delivery to the postal service.  In his case the revenue officer (RO) attempted to hand deliver the CDP notice, but a dog prevented him from making it up the driveway. So, the RO went back to his office where two days later, the RO mailed the CDP notice using certified mail but did not change the date on the notice itself from the date it bore on the date he attempted personal delivery. The taxpayer claimed that the earlier date on the notice governed the 30-day period within which he needed to file a timely CDP request.  The Tax Court held that the date of mailing governs and not the date on the notice.  He unsuccessfully appealed that decision as discussed further below. And for further discussion, Jack Townsend has also written about this case here.

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In 2019, the Department of Justice (DOJ) brought a collection suit against Weiss for his self-reported taxes shown on his 1986-1991 returns seeking to reduce the assessment to judgment.  He filed all those returns late in 1994.  By the time the suit was filed, he owed about $800,000.  How could the collection statute of limitations (CSED) remain open more than 15 years after it would normally have expired?  The opinion of the court does an excellent job detailing the facts and walking carefully through all of the suspensions that occurred.

Mr. Weiss filed bankruptcy three times.  Filing bankruptcy extends the CSED from the time of the bankruptcy petition until the lifting of the automatic stay plus an additional six months.  Depending on the type of bankruptcy, this period can add several years to the CSED. Then he received a notice of intent to levy (NOIL) and requested a CDP hearing, petitioned the Tax Court (in 2011), appealed to the D.C. Cir., then unsuccessfully sought cert.  This part of his collection history is chronicled in the prior blog posts referenced above.  The consequence of three bankruptcy cases and one very long CDP case is that the IRS calculated the statute of limitations on collection remained open as of the date of the filing of the suit against Mr. Weiss.  Because of the amount of money he owed combined with some belief at the IRS that he had assets which would at least in part exist to satisfy the liability, the RO assigned to his case, perhaps the same one last seen running from the dog in Mr. Weiss’ yard, recommended that the government file suit, the IRS Chief Counsel’s office concurred as did DOJ.

In the collection suit, Mr. Weiss moved for summary judgment once again arguing that the CSED had expired by the time the DOJ brought suit.  His argument in this case differed from his argument in the CDP case which is a good thing, since he would have been barred from making the exact same argument again.  Here he argues that the filing of the request for cert with the Supreme Court did not extend the CSED.  Here is the pertinent tolling language from 6330(e)(1):

[I]f a hearing is requested under subsection (a)(3)(B), the levy actions which are the subject of the requested hearing and the running of any period of limitations under section 6502 . . . shall be suspended for the period during which such hearing, and appeals therein, are pending. In no event shall any such period expire before the 90th day after the day on which there is a final determination in such hearing.

Mr. Weiss argued that a cert. petition is not an “appeal” under the terms of the statute, since it is discretionary and not called an appeal.  The district court, in an opinion dated May 21, denied the motion, holding that a cert. petition is an appeal.  The district court says that a cert. petition is commonly called an appeal, even if it technically isn’t.

The district court’s opinion does not surprise me.  I will also not be surprised if Mr. Weiss decides to appeal the opinion.  I do not say that because I think he will win his appeal.  In the end, if Mr. Weiss decides not to appeal or loses on the appeal, the IRS will have a judgment against him.  As discussed in a prior post, the judgment will give the IRS many more years to attempt to collect from him.  We may have further opportunities to discuss tax procedure issues related to Mr. Weiss.  

In addition to bringing the case to my attention, Carl also reminded me that the language concerning Mr. Weiss in the most recent case is language that has created some controversy in the CDP area before because Congress chose the wrong language to describe a petition to the Tax Court. The opinion doesn’t mention the fact that in 2015, 6330(d)(1) was amended to cease calling the Tax Court proceeding an appeal. While it fixed one problem regarding the language it used to describe the filing of a Tax Court petition, Congress forgot at that time to conform the language in 6330(e)(1).  But, the Tax Court proceeding was called an “appeal” at the time that Weiss petitioned from his wrongly dated CDP notice. 

Carl reminded me that any work done on fixing CDP should make sure to ask for this technical correction to conform 6330(e)(1) language to 6330(d)(1)’s current language. There are two sentences in section 6330(e)(1) that need to be fixed — the above-quoted one and the final sentence, which reads:  “The Tax Court shall have no jurisdiction under this paragraph to enjoin any action or proceeding unless a timely appeal has been filed under subsection (d)(1) and then only in respect of the unpaid tax or proposed levy to which the determination being appealed relates.”  Perhaps Mr. Weiss’ argument concerning the description of the request for cert. will cause a tightening and conforming of the language in the statute the next time it is amended.  If it does, then some good will have come out of the lengthy effort to collect from Mr. Weiss.

Sending Notices with Bad Dates

On June 22, 2020 National Taxpayer Advocate Erin Collins issued a blog post advising readers to keep an eye out for notices with expired action dates.  The post notes that “during the shutdown, the IRS generated more than 20 million notices; however, these notices were not mailed.  As a result, the notices bear dates that now have passed, some by several months and some of the notices require taxpayers to respond by deadlines that have also passed.” I will repeat myself once or twice in this post but if I am reading it correctly the IRS is knowingly and intentionally creating a false entry on thousands, perhaps tens of thousands, of taxpayers’ official records of account.

The NTA describes as a silver lining the fact that the IRS is granting additional time to respond before interest or penalties apply and that the IRS is putting inserts with the letters to explain something about the mismatch in the date of mailing and the dates on the letters.  I will talk more about some of the letters the NTA mentions in her blog post.  I found myself wondering about several things that were not explained in the NTA’s blog post.  Why did the IRS print these notices?  Why doesn’t the IRS shred the notices and recycle the paper in order to issue new notices with the proper dates on the notices?  Why hasn’t the IRS issued a news release or Tax Tip about the notices to alert taxpayers and practitioners?  Prior to the NTA blog post, the IRS only released this information though its National Public Liaison (NPL), which, while helpful, does not reach a wide audience. And while many people read the NTA blog posts, I don’t think it has a readership on a par with broadly released statements from the IRS.

The IRS might think it has communicated to practitioners. It pushed this news out through the NPL on June 9. The stakeholder liaison is an inadequate way to disseminate important news. On the day of the stakeholder liaison email, IRS quietly updated the page on IRS operational status to include the information. It also posted this news as a “Statement on Balance Due Notices” here.  I do not want to detract from the important discussion of the decision itself, but it is also worth mentioning that the information the IRS has made public on this situation and the method and medium of making it public, fails to signal the importance of this action.

Yesterday the NTA released her 2021 Objectives Report to Congress, which confirms the information in her blog post. Kudos to the NTA for including the problem of outdated notices in the news release accompanying the report. This will help get the word out to practitioners.

In a letter to Commissioner Rettig, Representatives Neal and Lewis expressed their concern over the outdated notices and suggested that the IRS take steps to “ensure no taxpayers are penalized” for the IRS’s inability to timely process correspondence. For the reasons explained below, this will not be easy to do if the IRS moves forward with its plan to mail the outdated notices.

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The NTA states that several dozen kinds of IRS notices will be mailed in the next month or two.  Maybe there is still time for the IRS to reconsider its decision to send out-of-date notices.  I hope so.  Here, I will discuss a few of the notices she mentioned.  Before starting the specific discussion, I note that many of these notices are required by statute.  I draw a distinction between statutorily required notices and other types of IRS notices.  While the best practice would be to send out notices on the date listed on the notice for all notices, the purposeful mailing of misdated statutorily required notices creates a more serious problem.

No matter what an insert says, the taxpayer will receive a statutorily mandated notice triggering statutorily prescribed duties and response times with the wrong date on the notice and the wrong date(s) for responding.  In the last two sentences of her blog post the NTA mentions that the IRS computer system will show as the business record of the IRS the wrong date.  She says “[c]ompounding confusion surrounding notice dates, IRS transcripts for taxpayers’ accounts will also reflect incorrect dates for some of the notices.” 

This could have grave consequences for both taxpayers and the IRS if the dates on the letters compromise the IRS business records.  First, taxpayers who do not keep the envelope and the letter may have trouble proving that the dates on the letter did not reflect the actual mailing date when making a future challenge.  Second, if the IRS builds a business record which it knows contains inaccurate information it makes all of its records suspect.  Courts regularly rely on certified transcripts from the IRS for the accuracy of the date an action took place.  If the IRS knowingly puts the wrong dates into its system of records, that calls the entire system into question.  This could have consequences for the IRS far beyond the consequences of recycling these letters and making sure that its records accurately reflect actions taken.

Here you have the NTA saying that the IRS business record is inaccurate.  That could be powerful evidence in court to strike at many IRS actions taken that stem from 2020.  It also has the potential to support grounds for damages if certain collection actions occur after a wrongful assessment or wrongful filing of a notice of federal tax lien.  It may present the possibility that in a CDP case a taxpayer may wish to lean on a rights-based failure to inform argument as a grounds to invalidate the proposed collection action.

Notice and Demand

IRC 6303 requires that the IRS send out a notice and demand letter within 60 days of the making of an assessment.  Case law going back at least three decades holds that the failure to send the notice and demand letter within the 60-day period does not invalidate the assessment but there is some possibly contrary case law.  The failure impacts the timing of the creation of the federal tax lien.  IRC 6321 and 6322 provide that the federal tax lien arises upon assessment, notice and demand and failure to pay within the demand period.  Ordinarily, failure to pay within the demand period causes the federal tax lien to relate back to the date of assessment.  If the IRS sends out the notice and demand beyond the 60-day period, the FTL will only arise upon non-payment and will not relate back to assessment.

You might say “so what,” because who cares about the FTL.  Only after the IRS filed the notice of federal tax lien (NFTL) does the IRS create a perfected lien.  The unperfected FTL still, however, has meaning.  For example, it attaches to property transferred for less than full value.  If a fight arises regarding the attachment of the FTL, the actual date of the mailing of the notice and demand letter matters.  Because of the pandemic, the IRS could not avoid sending out many notice and demand letters after the 60-day period.  Sending them out beyond the time frame must occur due to no fault of the IRS but sending a significantly backdated letter will undoubtedly confuse many recipients and may cause some to even challenge the validity of a notice which on its face asks the taxpayer to do something impossible.  If the notice and demand letter is invalid, the IRS has real problems because it would not have created the FTL, which has many consequences, including but certainly not limited to violating disclosure of a taxpayer’s liability if the IRS records a notice of federal tax lien when no underlying lien exists.

There is also the problem of the address.  The IRS must mail the notice and demand letter to the taxpayer’s last known address.  The IRS must use the taxpayer’s address as shown on the taxpayers most recently filed and properly processed return, unless clear and concise notification of a different address is provided. See, e.g., Duplicki v. Comm’r, T.C. Summary Opinion 2012-117.If these notices have been sitting in the bowels of a service center for months during the filing season, it is quite possible that many taxpayers have filed returns between the time of the creation of the notice and demand letter and the mailing of that letter.  The NTA does not mention if the insert changes the address on the letter.  I imagine it does not.  While many paper returns filed in the past few months remain in the parking lots of the service centers to which they were sent, the vast majority of taxpayers filed electronically.  Many of those returns will have gone through processing, and the IRS will know the taxpayer’s new address before these musty notices get mailed.  Mailing the notice and demand letters to something other than the taxpayer’s last known address will create an invalid notice and demand letter creating the same problems described above.  Maybe these are all notice and demand letters based on returns filed with insufficient remittance and processed early in the filing season, so the notice on the letter is the address on the most recent return.  If these notices do not come from that source, the likelihood that a fair percentage will bear an address other than the last known address is reasonably high.  This means taxpayers should be prepared to challenge the notices on this basis, which is not often done.

Math Error Notices

As most readers know the name math error notice is a misnomer.  Subsection 6213(g)(2) provides the definition of math error notice.  Sixteen different actions trigger the sending of a math error notice only one of which is 1+1=3.  Earlier this year, Les updated Chapter 10 of the treatise “IRS Practice and Procedure” and adopted the practice of the Taxpayer Advocate Service of calling this notice the summary assessment authority notice.  For this post I will stick with the misleading language of the statute, but errors in math play a small role in these notices.

The math error notice provides an exception to the need for the IRS to send a notice of deficiency in order to make an assessment.  Instead of a 90-day letter offering the chance to go to Tax Court, the taxpayer receiving a math error notice has 60 days to write back to the IRS expressing disagreement or the IRS will make the assessment.  We have not written enough about math error notices but some of our prior posts on this topic exists here, here, here and here.  Nina Olson wrote often about these notices as the NTA.  Find some of her writings here, here, here and here

This notice cuts off rights.  Most taxpayers fail to respond giving the IRS a shorter, easier path to assessment than the notice of deficiency.  Math error notices confuse taxpayers in the best of times as discussed in some of the NTA annual reports.  If you couple the ordinary confusion of these notices with dates that make no sense, the likelihood of a failure to response undoubtedly goes up.

Note that the math error notice must be mailed to the taxpayer’s last known address and the discussion above concerning notices with something other than the last known address applies here.  If the math error notice goes to the wrong address but the IRS makes an assessment following a failure of the taxpayer to respond, then the IRS has a bad assessment and all of the things that flow from a bad assessment.  These “things” can take a lot of time and effort to unwind.  They can also cause the IRS to lose the right to assess if the unwinding occurs after the statute of limitations on assessment has passed.

On a smaller scale the government faced a similar problem in the government shutdowns of 2013 and 2018-2019.  The system seems to generate notices automatically at certain points in time.  The system does not understand when the government ceases to operate.  In the prior shutdowns it sent out notices of deficiency and collection due process notices while the government was closed, but those letters didn’t have the wrong date and the taxpayer could still file a Tax Court petition or CDP request in the right time frame.

Collection Due Process Notices  

I wrote a blog post in 2018 about a CDP case in which the Revenue Officer went to the taxpayer’s house to deliver the CDP notice but the taxpayer’s dog deterred the RO from making delivery.  He went back to his office and mailed the CDP notice to the taxpayer to avoid bodily injury; however, he mailed the notice two days later.  When he mailed the notice, it still bore the date of his canine-thwarted personal delivery effort.  The Tax Court concluded that the time to make a CDP request runs from the date of mailing (or delivery) and not the date on the CDP notice.

Now the IRS will throw into the system potentially thousands of wrongly dated CDP notices, causing the recipients confusion and filing dates that may or may not fall within 30 days of the actual date of mailing.  How many taxpayers will keep the letter and the envelope?  Will the IRS have the correct date of mailing in its database or the original date of mailing?  Remember that these mailings result not from a single RO working a case but from a mass-produced effort at the service centers.

Are CDP notices sent by the IRS with knowingly wrong dates valid CDP notices?  If invalid, it makes all downstream levy actions wrongful.  Will the CDP notices be sent to the taxpayer’s last known address or to some other address?  If sent to something other than the taxpayer’s last known address, the CDP notices are not good.

Conclusion

The IRS should throw away these letters.  (Recycle them please with appropriate taxpayer identification precautions.)  Send new letters in which the dates on the letters match the dates of mailing.  Yes, this will be expensive in cost of production of the letters and the time it takes to create the new letters.  But it may prove less expensive than the alternative.  It certainly will create less confusion among the taxpayers receiving the letters, the representatives trying to assist the letters, and the courts interpreting the IRS actions.

Taxpayer Wins Merits Challenge in CDP Case

There are several CLE programs happening if you are looking for training.  The ABA Tax Section has started the online programing based on the sessions that would have been held at its May meeting.  You can see the upcoming programming and sign up for that training here

The Annual NYU Tax Controversy Forum starts this afternoon and features basically everyone in the top brass at the IRS whose work involves tax controversy, aka procedure.  You can sign up for it here

On Monday, June 22 at 1:00 ET the Pro Bono and Tax Clinics committee of the ABA is putting on another one of its COVID-19 seminars.  This one is entitled EIPs, Tax Returns, and Judicial Orders in the context of Domestic Violence during the COVID-19 Era.  It is cosponsored with the ABA’s Commission on Domestic & Sexual Violence.  It’s free for members and you can register for it here.  If you read the outstanding post by Nancy Rossner, here, you know it’s a hot topic.  Nancy is on the panel along with several other experts.

We have blogged on several occasions about the Tax Court’s narrow view of the circumstances in which it can engage in merits litigation in the Collection Due Process context.  In Amanda Iris Gluck Irrevocable Trust v. Commissioner, 154 T.C. No. 11 (2020) the Tax Court allows merits litigation in a situation in which it would not allow the litigation of the item in a deficiency case.  The taxpayer does not win everything sought in the litigation but does break new ground.

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The IRS made computation adjustments to the Trust’s returns for 2012 through 2015 based on IRC 6231(a)(6) eliminating the NOL the Trust claimed for 2012 and disallowing the claimed carryforwards for 2013-2015, resulting in balance due amounts for those years.  Pursuant to the statute, the IRS immediately assessed the resulting tax without issuing a statutory notice of deficiency.  After the assessment, the IRS sent out collection notices including the notice of intent to levy.  The trust requested a Collection Due Process (CDP) hearing for 2012 through 2016 which led to the Tax Court case.  

The Tax Court found that it lacked jurisdiction for the 2012 year because no collection action existed for that year.  Although that year marked the root of the adjustments, the adjustments did not result in any liability on which the CDP request could be based.  For the 2013 year the payment of the liability mooted the CDP hearing.  This left 2014-15 where outstanding liabilities remained.  The IRS moved for summary judgment on those years, but the Court denies the motion, finding that for those years the taxpayers can challenge the merits of the underlying liability and the computational adjustment that resulted in the change to the 2012 net operating loss.

A partnership called Promote had some allocated gain it failed to report and it also, along with its partners, failed to file Form 8082, Notice of Inconsistent Treatment or Administrative Adjustment Request, with respect to the gain.  On its 2012 return the Trust did not report its distributive share of the gain from the partnership and did not notify the IRS of the apparent inconsistency, which allowed the IRS to make a computation adjustment without giving the Trust a pre-assessment challenge.

The Settlement Officer in Appeals determined that the Trust, although it did not receive a statutory notice of deficiency, had a prior opportunity because it could have paid the tax and filed a claim for refund.  In the Tax Court case the IRS wisely conceded the incorrectness of the SO’s determination on this point.

The Court holds that since the Trust did not have a prior opportunity to contest the liability without full payment and a claim for refund, it did not have a prior opportunity within the meaning of the statute.  The Court does not state that the failure to receive a statutory notice of deficiency, by itself, is a basis for CDP merits litigation.

The Court states:

In CDP cases involving assessable penalties (viz., penalties not subject to deficiency procedures), we have jurisdiction to review a taxpayer’s underlying liability for the penalty provided that he raised during the CDP hearing a proper challenge thereto. See Yari v. Commissioner, 143 T.C. 157, 162 (2014) (ruling that section 6330(d)(1) “expanded the Court’s review of collection actions * * * where the underlying tax liability consists of penalties not reviewable in a deficiency action”), aff’d, 669 F. App’x 489 (9th Cir. 2016); Callahan v. Commissioner, 130 T.C. 44, 49 (2008). Applying the same reasoning we have held that we may, in a CDP case, review underlying liabilities arising from adjustments to partnership items of TEFRA partnerships, even though such items would not have been subject to our review in a deficiency setting. See McNeill v. Commissioner, 148 T.C. 481, 489 (2017).

It does not always work that assessable penalty cases result in the ability to challenge the merits, even if the taxpayer raises the issue during the CDP process. Lavar Taylor made three failed attempts in the circuit courts to challenge the merits of assessable penalties in CDP cases discussed here, here and here. Because of the Court’s view on prior opportunity, no simple explanation seems to work.

In addition to seeking to the SO’s determination on the prior opportunity issue, the IRS also argued before the court the failure of the Trust to properly raise 2014 and 2015 before the SO. In CDP cases the failure to raise an issue at the administrative stage can preclude the taxpayer from raising it once in the Tax Court. The IRS argued that the Trust focused its attention on 2012; however, the Tax Court rejects this argument stating:

Although petitioner might have articulated its position a bit more clearly, its basic contention was not that it had a credit from 2012 sufficient to eliminate its liabilities for subsequent years. Rather, it was contending that the IRS erred in disallowing the NOL carryforward deductions that it had claimed for 2014 and 2015. The situation is no different in principle from one in which the IRS has disallowed (say) business expense deductions for the CDP year. In both scenarios the taxpayer is challenging his underlying tax liability for the CDP year by disputing the disallowance of deductions he had claimed for that year.

Because the source of the problem was the disallowance of NOLs in 2012, it made sense for the Trust to argue about what happened in 2012. The Trust could not have effectively argued about 2014 and 2015 without addressing the year in which the NOLs were disallowed. Even though the Trust could have more clearly laid out its argument, it did enough to preserve the argument for the years impacted by the disallowance of the NOL.

The ruling here does not mean the Trust wins but merely that it will get its chance to show that the computational adjustment made in 2012 did not correctly adjust that return. Because the Code allows a no pre-assessment contest of this type of adjustment, the Tax Court would not routinely have the opportunity to review an adjustment of this type. Here, it has the opportunity to exercise its jurisdiction over something it would not otherwise see because of the CDP merits process.

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

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.