Designated Orders: One-Two Punch for Respondent in CDP Disputes before Judge Gustafson

This week Patrick Thomas who teaches and runs the low income taxpayer clinic at Notre Dame Law School brings us the designated orders. I have written before about the lessons in making motions for summary judgment that Judge Gustafson provides to Chief Counsel attorneys. Like the wonderful blog series written by Bryan Camp entitled Lessons from the Tax Court (samples here and here), Judge Gustafson provides his own lessons from the Tax Court to the attorneys in Chief Counsel’s Office who file summary judgment motions with him without carefully preparing their motions. At some point we hope the Chief Counsel attorneys will read our blog posts (not to mention his prior orders) and realize that they need to spend some time with these motions and especially when they know the motion will go to Judge Gustafson’s chambers. Professor Thomas writes about the Judge’s most recent lessons below. Keith 

Designated Orders: 9/17 – 9/21/2018

There were only three orders this week, two of which will be discussed here. Not discussed is a routine scheduling order from Judge Jacobs. The two others are both from Judge Gustafson and involve an IRS motion for summary judgment in collection due process cases. Judge Gustafson denies both motions—the first because material facts remained in dispute, and the second because the motion mischaracterized facts elsewhere in the record (and omitted other facts that might have saved the motion). More below.

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Docket No. 26438-17L, Schumacher v. C.I.R. (Order Here)

This CDP case stems from a Notice of Federal Tax Lien filed against Mr. Schumacher for multiple tax years. After Petitioner timely requesting a hearing, the Settlement Officer (SO) sent an initial contact letter to Petitioner and his authorized representative—at least, to what the IRS computers thought was his authorized representative. On the hearing date, the SO called petitioner; the order states “[Petitioner] was not available and his telephone message stated that he did not accept blocked calls.” I’m assuming that the SO was therefore unable to leave a message on Petitioner’s voicemail.

Undeterred, the SO attempted to call the authorized representative on file with the IRS CAF Unit. The representative’s office informed the SO that they no longer represented Petitioner. The SO called the next listed authorized representative and left a message, but didn’t receive a response.

So, on that day, the SO sent a letter to Petitioner, noting these attempts. It further stated that if Petitioner didn’t contact the SO within 14 days, she would issue a Notice of Determination sustaining the lien. 14 days came and went, and the SO did just that.

In the motion, Respondent argues that the SO was justified in issuing the NOD, because neither Petitioner nor his authorized representative responded during the CDP hearing. In opposition, the Petitioner notes that (1) he didn’t receive any phone calls from the IRS and (2) he didn’t have any authorized IRS representative at that time. Judge Gustafson finds the latter plausible, given there’s no indication on the Form 12153 that Petitioner had representation. Good for Petitioner, as the Tax Court will ordinarily sustain a NOD if a truly authorized representative fails to respond.

Judge Gustafson denies the motion because, in his view, there appears to be a dispute as to whether Petitioner had a reasonable opportunity to challenge the NFTL. Specifically, Judge Gustafson finds troubling that there were no attempts to phone Petitioner a second time and no attempt to “unblock” the SO’s phone, such that Petitioner could receive its calls or a message. Further, he takes issue with the language in the 14-day letter sent to Petitioner; it included language noting that “your account has been closed” and might reasonably suggest to a taxpayer without CDP experience that the SO had already made her decision. Accordingly, Judge Gustafson denies the motion and sets the case for trial in Baltimore on November 5.

Takeaways: First, at the end of representation, practitioners should remember to withdraw their Forms 2848. Some portion of the confusion could have been avoided here.

Second, I didn’t know there was a mechanism that could block voicemails or calls from blocked numbers. To the extent our clients have such a mechanism, I might advise them to disable this feature until their tax controversy is resolved. As an aside, to the extent this seeks to reduce spam calls, it appears ill suited to the task. From my own experience, I don’t think I’ve ever received a spam call from a blocked number; rather, it’s usually an IRS employee calling. The spam calls tend instead to come from unblocked numbers.

Docket No. 1117-18L, Northside Carting, Inc. v. C.I.R. (Order Here)

This combined NFTL and levy case involves Petitioner’s unpaid employment taxes. Here, Petitioner does itself no favors in not responding to the motion for summary judgment. Nonetheless, Judge Gustafson finds that Respondent fails to carry own their burden on the motion because of other record evidence.

Respondent argues that Petitioner asked for an OIC or installment agreement in the CDP request, failed to provide the information and documentation necessary to consider an installment agreement. Specifically, Respondent notes that when Petitioner’s authorized representative informed the SO on July 13, 2017 of their desire to renegotiate a collection alternative, the SO asked for additional documentation. That documentation not being forthcoming, the motion states, the SO justifiably upheld the levy and NFTL filing.

Not so fast, says Judge Gustafson. The administrative record shows that the representative submitted some portion of the requested information on two occasions after July 13. Ultimately, the SO still wanted more; after a final deadline of November 16, the SO issued the Notice of Determination.

Judge Gustafson finds the motion’s failure to recite this information problematic. It doesn’t say what was requested or given—only that the SO requested something, part of which was provided and part of which was not. This is a material difference; if the SO receives no information at all, and issues a NOD on that basis, that’s understandable. But here the Court must at least understand the information that was provided; perhaps the SO required a piece of meaningless or trivial information, and on that basis upheld the NFTL and levy. Probably not, but without the specific information, the Court is left without any idea.

The motion could probably have been saved for another reason: when the NOD was issued, Petitioner wasn’t in filing compliance, a necessary requirement for any collection alternative. While the declaration underlying the motion mentions this, the motion itself fails to do so. Judge Gustafson seems unwilling to entertain an argument not presented to the Court, and so ultimately denies the motion, setting the case for trial in Boston on October 15. He suggests that an ultimate outcome may be remand to Appeals for further development of the record, or simply that the NFTL cannot be sustained.

So, good news for Petitioner. Hopefully Petitioner realizes its good fortune, and begins to participate in this case.

 

For IRS Appeals Office, An Epidemic of Remands

We welcome back frequent commentor and occasional guest blogger Bob Kamman. As usual, Bob digs into a topic that the rest of us may have overlooked. Today, he writes, and primarily reports, about remands from the Tax Court. Remands in Tax Court cases most frequently occur in the Collection Due Process (CDP) setting in which the Appeals employee reviewing the CDP case fails to properly review some aspect of the case. When Chief Counsel’s office or the Tax Court notices the failure, the case gets sent back to Appeals to fix the problem. In most CDP cases a remand serves as the best result a taxpayer can hope for in the case. It does represent an opportunity for the Appeals to agree with the taxpayer’s position after initially disagreeing but a remand does not necessarily mean the taxpayer will succeed. It generally does, however, signal some failure at Appeals. To that extent, Bob’s research shows that Appeals appears to fail often. Remands can occur after a failed motion for summary judgment by Chief Counsel’s office and we have written often about failures of those motions and particularly the observations of Judge Gustafson. Remands also delay the process. Bryan Camp recently wrote about a case that serves as a reminder of the slow movement of CDP cases which is something Carl Smith and I wrote about in an article in 2011. Today’s post is long which speaks to the problem. Keith

The New York Mets once again have avoided the World Series, but we still recall their first manager Casey Stengel and his immortal question, “Can’t anybody here play this game?”

The same question might now be asked about the IRS Appeals Office. It seems that Chief Counsel is batting clean-up – that is, cleaning up the cases that end up in Tax Court and must be sent back down to the minors for the administrative equivalent of a not-so-instant replay “further review.”

I did a search for the word “remand” in Tax Court orders for the period September 4 through October 4, 2018.   How many motions to remand would you expect IRS lawyers to file in a month? Would twenty seem to be a high number?

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Here is the list, along with excerpts from the orders. Most of these are CDP cases, although one “whistleblower” case appears. Another case came back up a year after a remand, and there were still problems that resulted in an IRS motion for summary judgment being denied.

For many of these cases, a trial date had already been set, some of them within the following month. For one, the IRS asked for the remand at the Tax Court calendar call.

1) Murphy, Docket No. 10992‑18SL. Chief Judge Foley.

ORDERED that the above‑referenced motion to remand is granted, and this case is remanded to respondent’s Office of Appeals for the purpose of affording petitioner an administrative hearing pursuant to I.R.C. section 6320 and/or 6330. It is further

ORDERED that respondent shall offer petitioners an administrative hearing at respondent’s Appeals Office located closest to petitioners’ residence (or at such other place as may be mutually agreed upon) at a reasonable and mutually agreed upon date and time, but no later than December 13, 2018.

2) Morring, Docket No. 13226‑18 L. Chief Judge Foley.

On September 5, 2018, respondent filed a Motion To Remand. Upon due consideration, it is

ORDERED that, on or before October 1, 2018, petitioners shall file an Objection, if any, to the above‑described motion to remand. Failure to comply with this Order may result in the granting of the motion to remand.

3) Ferrie, Docket No. 17979‑17 L. Judge Kerrigan order dated September 12.

This case is scheduled to be tried at the Court’s session in Los Angeles, California beginning September 24, 2018. On September 11, 2018, respondent filed a motion to remand in which it asks the Court to remand this Collection Due Process case to respondent’s Office of Appeals for further consideration. The motion further indicates that petitioner does not object to granting of the motion. Upon due consideration, it is

ORDERED that respondent’s motion to remand is granted and this case is remanded to respondent’s Office of Appeals for purposes of affording petitioner an administrative hearing pursuant to I.R.C. section 6330.

4) Harropson, Docket No. 16313‑17 L. Judge Kerrigan order dated September 19.

This case is calendared for trial at the Court’s session in Los Angeles, California beginning September 24, 2018. On September 18, 2018, respondent filed a motion to remand in which it asks the Court to remand this Collection Due Process case to respondent’s Office of Appeals for further consideration. The motion further indicates that petitioner does not object to the granting of the motion. Upon due consideration, it is

ORDERED that respondent’s motion to remand is granted and this case is remanded to respondent’s Office of Appeals for the purposes of affording petitioner an administrative hearing pursuant to I.R.C. section 6330. It is further

ORDERED that this case is stricken for trial from the Court’s September 24, 2018, trial session in Los Angeles, California, and that the undersigned judge retains jurisdiction. . . .

ORDERED that on or before December 18, 2018, the parties shall file with the Court a joint status report regarding the then‑present status of this case.

5) East Bank Center LLC, Docket No. 7194‑17L. Judge Gale.

On September 15, 2017, the parties, concluding that the foregoing findings in the notice of determination were contradictory, jointly moved for a remand of the case for a supplemental hearing. On September 19, 2017, the Court granted the motion and the case was remanded to Appeals for a supplemental hearing.

The record as currently developed does not demonstrate to our satisfaction that respondent is entitled to a decision in his favor as a matter of law. It is undisputed that SO Kammers, in connection with the supplemental hearing, reviewed petitioner’s 2016 Form 1065 and used the financial information therein as her basis to determine petitioner’s ability to pay. An Appeals officer’s use of a tax return in this manner would appear to contravene Internal Revenue Manual (IRM) pts. 8.23.3.3(5) and (6) (Aug. 18, 2017). In these circumstances, we conclude that summary adjudication is not appropriate. Accordingly, we shall deny respondent’s Motion.

6) Lewis, Docket No. 14911‑17W. Judge Goeke order dated September 26.

This case is calendared for trial at the Session of the Court commencing November 5, 2018, in St. Louis, Missouri.

Upon due consideration of respondent’s Motion to Remand, filed September 26, 2018, it is

ORDERED that petitioner is directed on or before October 15, 2018, to file with the Court a response to respondent’s above‑referenced motion.

7) Barragan, Docket No. 18245‑17L, Judge Kerrigan.

On September 24, 2018, this case was called from the calendar for the Trial Session of the Court at Los Angeles, California, at which time a Joint Motion to Remand was filed. Upon due consideration, and for cause more fully appearing in the transcript of the proceeding, it is

ORDERED that the joint motion is granted and this case is remanded to respondent’s Office of Appeals for the purpose of affording petitioner an administrative hearing pursuant to I.R.C. § 6330.

8) Dennis, Docket No. 398‑18 L. Chief Judge Foley.

Upon due consideration of respondent’s Motion To Remand, filed in the above‑docketed proceeding on August 20, 2018, and first supplement thereto clarifying the Court’s jurisdiction in this matter, filed August 31, 2018, it is

ORDERED that the above‑referenced motion to remand, as supplemented, is granted, and this case is remanded to respondent’s Office of Appeals for the purpose of affording petitioners an administrative hearing pursuant to I.R.C. section 6320 and/or 6330.

9) Akins, Docket No. 22097‑17L. Judge Gale.

This case is calendared for trial at the Los Angeles, California, trial session commencing November 26, 2018. On July 19, 2018, respondent filed a Motion for Continuance and a Motion to Remand therein requesting that the Court continue this case for purposes of remanding it to respondent’s Office of Appeals for a supplemental hearing. By Order dated July 23, 2018, the Court directed petitioner to file responses stating his position regarding respondent’s Motions by August 13, 2018. To date, petitioner has not filed a response to either Motion. The foregoing considered, it is

ORDERED that respondent’s Motion for Continuance, filed July 19, 2018, is granted and this case is stricken from the calendar of the November 26, 2018, Los Angeles, California, trial session, and continued. It is further

ORDERED that respondent’s Motion to Remand, filed July 19, 2018, is granted and this case is remanded to respondent’s Office of Appeals for purposes of affording petitioner a supplemental collection due process hearing under I.R.C. section 6330.

10) Billing Enterprise, Inc., Docket No. 20540‑17 L. Judge Paris.

This case is calendared for the trial at the November 5, 2018, Dallas, Texas Trial Session of the Court. On September 4, 2018, respondent filed a Motion to Remand. After due consideration, it is

ORDERED that jurisdiction in this case is retained by this Division of the Court. It is further

ORDERED that this case is continued from the November 5, 2018, Dallas, Texas Trial Session of the Court until further direction by this Division of the Court. It is further

ORDERED that respondent’s Motion for Remand is granted, IN THAT this case is remanded to respondent’s Appeals Office for reconsideration of petitioner’s request for a collection alternative and to allow respondent to subsequently issue a supplemental notice of determination or other appropriate notice.

11) Horner, Docket No. 15601‑17 L. Chief Judge Foley.

On July 27, 2018, respondent filed a Motion To Remand. Although the Court directed petitioner to file an Objection, if any, to respondent’s motion, petitioner failed to do so. Upon due consideration, it is

ORDERED that respondent’s Motion To Remand is granted and this case is remanded to respondent’s Appeals Office for further administrative hearing pursuant to I.R.C. section 6330.

12) Ceneviva, Docket No. 19445‑17 L. Chief Judge Foley.

On August 28, 2018, respondent filed a Motion To Remand. In it, respondent states that petitioner has no objection to the granting of the motion. Upon due consideration, it is

ORDERED that respondent’s Motion To Remand is granted and this case is remanded to respondent’s Appeals Office for further administrative hearing pursuant to I.R.C. section 6330 wherein the assigned appeals officer shall consider collection alternatives proposed by petitioner as well as any other issue appropriately raised by petitioner.

13) Jenkins, Docket No. 25422‑17 L. Judge Lauber order of September 10, 2018.

This collection due process (CDP) case is calendared on the Court’s October 22, 2018, Washington, D.C., trial session. On November 8, 2017, the IRS sent petitioner a Final Notice of Intent to Levy and Your Right to a Hearing and petitioner timely requested a CDP hearing. On September 7, 2018, the parties filed a Joint Motion to Remand asking that the case be sent back to the IRS Office of Appeals for a supplemental CDP hearing. Upon due consideration, it is

ORDERED that the parties’ Joint Motion to Remand, filed September 7, 2018, is granted, and this case is remanded to the IRS Office of Appeals for a supplemental CDP hearing.

14) McNeil, Docket No. 19965‑17 L. Judge Thornton.

This case is calendared for trial during the Court’s October 1, 2018, Dallas, Texas, trial session. On September 7, 2018, respondent filed a motion to remand stating therein that petitioners have no objection to the granting of said motion. Upon due consideration, it is

ORDERED: That this case is stricken for trial from the Court’s October 1, 2018, Dallas, Texas, trial session and jurisdiction is retained by the undersigned. It is further

ORDERED: That respondent’s above‑referenced motion to remand is granted and this case is remanded to respondent’s Appeals Office for a supplemental collection due process hearing with a new settlement officer for further consideration.

15) Hodges Legends Café LLC, Docket No. 18317‑16SL. Judge Panuthos.

This case is presently calendared for trial at the Trial Session of the Court scheduled to commence on December 3, 2018, at Atlanta, Georgia. On September 13, 2018, respondent filed a Motion to Remand this case to respondent’s Appeals Office. Premises considered, it is

ORDERED that respondent’s motion to remand is granted and this case is remanded to respondent’s Appeals Office for the purpose of affording petitioner an administrative hearing pursuant to I.R.C. section 6330.

16) Whitesides, Docket No. 17752‑17 L. Judge Kerrigan.

This case is scheduled to be tried at the Court’s session in San Francisco, California, beginning October 29, 2018. On September 28, 2018, respondent filed a motion for continuance and a motion to remand in which it asks the Court to remand this Collection Due Process case to respondent’s Office of Appeals for further consideration. The motions indicate that petitioners do not object to the granting of the motions. Upon due consideration, it is

ORDERED that respondent’s motion for continuance is granted in that this case is stricken for trial from the Court’s trial session beginning October 29, 2018, in San Francisco, California, and that the undersigned judge retains jurisdiction. It is further

ORDERED that respondent’s motion to remand is granted and this case is remanded to respondent’s Office of Appeals for the purposes of affording petitioners an administrative hearing pursuant to I.R.C. section 6330.

17) Russell, Docket No. 7757‑18 L. Judge Vasquez.

Upon due consideration of respondent’s motion to remand, filed September 13, 2018, and respondent’s motion for continuance, filed September 13, 2018, it is

ORDERED that respondent’s motion for continuance is granted in that this case is stricken for trial from the Court’s November 26, 2018, Tampa, Florida, trial session. It is further

ORDERED that respondent’s motion for remand to respondent’s Appeals Office is granted and this case is remanded to respondent’s Appeals Office for further consideration. It is further

ORDERED that respondent shall offer petitioner an administrative hearing at respondent’s Appeals Office located closest to petitioner’s residence (or at such other place as may be mutually agreed upon) at a reasonable and mutually agreed upon date and time, but no later than December 17, 2018.

18) Baxter, Docket No. 950‑18L. Judge Lauber.

This collection due process (CDP) case is calendared on the Court’s October 22, 2018, Washington, D.C. trial session. On September 17, 2018, respondent filed a Motion to Remand asking that the case be sent back to the IRS Office of Appeals for a supplemental CDP hearing. Petitioner does not oppose the motion and we shall grant it. Upon due consideration, it is

ORDERED that the respondent’s Motion to Remand, filed September 17, 2018, is granted, and this case is remanded to the IRS Office of Appeals for a supplemental CDP hearing.

19) Lucas, Docket No. 24611‑17 L. Judge Thornton.

This case is calendared for trial during the Court’s November 26, 2018, New York, New York, trial session. On September 21, 2018, respondent filed a motion to remand and stated therein that petitioner has no objection to the granting of said motion. Upon due consideration, it is

ORDERED: That this case is stricken for trial from the Court’s November 26, 2018, New York, New York, trial session and jurisdiction is retained by the undersigned. It is further

ORDERED: That respondent’s above‑referenced motion to remand is granted and this case is remanded to respondent’s Appeals Office for a supplemental collection due process hearing with a new settlement officer for further consideration.

20) Gibson, Docket No. 20421‑17 L. Judge Halpern.

This case is calendared for trial at the Court’s December 3, 2018, Las Vegas, Nevada trial session. On September 26, 2018, respondent filed a motion to remand. Respondent’s motion advises that petitioner has no objection to the granting of this motion. Upon due consideration, it is

ORDERED that respondent’s motion to remand is granted, and this case is remanded to respondent’s Office of Appeals, at respondent’s Appeals Office located closest to petitioner’s residence (or at such other place as may be mutually agreed upon) at a reasonable and mutually agreed upon date and time, but no later than December 27, 2018, for a supplemental CDP hearing with an appeals settlement officer, for the purpose of considering an offer in compromise or other alternative to collection of petitioner’s unpaid taxes.

21) Monaco, Docket No. 25731‑17 L. Chief Judge Foley.

On August 16, 2018, respondent filed a Motion To Remand. Although the Court directed petitioner to file an Objection, if any, to respondent’s motion, petitioner failed to do so. Upon due consideration, it is

ORDERED that respondent’s Motion To Remand is granted and this case is remanded to respondent’s Appeals Office for further administrative hearing pursuant to I.R.C. section 6330. It is further

ORDERED that the above‑referenced hearing shall take place at a reasonable and mutually agreed upon date and time, but no later than November 28, 2018.

22) Maddox, Docket No. 15184‑17 L. Judge Lauber.

This collection due process (CDP) case is calendared on the Court’s October 22, 2018, Washington, D.C., trial session. On August 20, 2018, respondent filed a Motion to Remand asking that the case be sent back to the IRS Office of Appeals for further consideration. By order dated August 24, 2018, petitioners were directed to file a response to respondent’s motion on or before September 17, 2018.

Petitioners did not respond to that order. Upon due consideration, it is

ORDERED that respondent’s Motion to Remand, filed August 20, 2018, is granted, and this case is remanded to the IRS Office of Appeals for further consideration.

23) Kelly, Docket No. 26941‑17SL. Judge Armen.

This case was called from the calendar for the Trial Session of the Court on September 24, 2018 at Chicago, Illinois. Both parties appeared and filed with the Court a joint Motion For Remand. After due consideration, and for cause more fully appearing in the transcript of the proceedings, it is

ORDERED that the parties’ joint Motion For Remand, filed September 24, 2018, is granted and this case is remanded to respondent’s Office of Appeals in order to conduct a supplemental hearing consistent with the aforementioned motion.

24) And finally there is the case of Johnson and Roberson, Docket No. 22224‑17 L, which was discussed here in the text and comments of the blog post for Designated Orders on October 3, 2018. Judge Gustafson suggested a remand, but petitioners declined, doubting that they would get to first base with the Appeals Office.

 

 

 

 

 

 

 

 

Tax Court Reiterates That It Lacks Refund Jurisdiction in Collection Due Process Cases

In McLane v. Commissioner, TC Memo 2018-149, the Tax Court followed its prior precedent in Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006) holding that it lacked jurisdiction in a Collection Due Process (CDP) case to grant petitioner a refund. Carl Smith blogged about the issue here when the McLane case was pending and he earlier blogged about the issue here when the DC Circuit affirmed the outcome in Greene-Thapedi in its holding in Willson v. Commissioner, 2015 U.S. App. LEXIS 19389 (Nov. 6, 2015). We have discussed other cases with this issue such as VK&S Industries v. Commissioner; ASG Services, LLC v. Commissioner; and Allied Adjustment Services v Commissioner (see post here) in which the court issued a designated order rather than an opinion. These cases serve as another reminder of the importance of orders, and particularly designated orders as a source of substantive rulings from the Tax Court even if these orders do not have precedential value.

Carl assisted the University of the District of Columbia Tax Clinic in filing an amicus brief in the McLane case. A link to the amicus brief, substantially written by Jacqueline Lainez’s student at UDC Roxy Araghi is here. A copy of the taxpayer’s brief and the IRS brief are here and here, respectively. The outcome is disappointing but not surprising given the prior precedent. In the opinion Judge Halpern provides a detailed explanation regarding why the Tax Court should not exercise jurisdiction to grant refunds in CDP cases but does not change the reasoning or outcome of Greene-Thapedi which is no doubt why the Tax Court marked this as a memorandum opinion.

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On October 19, 2009, Mr. McLane timely filed his 2008 income tax return pursuant to a 6-month extension to file and the mailing rules of section 7502. The return showed a balance due, and so he paid $957 toward that balance between December 2009 and October 2010 and another $800 between October 2010 and October 2012.   In August 2012, the IRS mailed a notice of deficiency to Mr. McLane disallowing various Schedule C deductions and seeking a deficiency with respect to his 2008 taxes. But, he never got the notice of deficiency. Some of the $800 had been paid after the IRS mailed the notice of deficiency. The IRS later filed a notice of federal tax lien (NFTL) against him, and he sought a CDP hearing in which he contended that the assessment was invalid because no notice of deficiency had been mailed. He also argued in the hearing that he could prove sufficient deductions, but he did not ask for a refund of any amount that he had paid.

Mr. McLane did not get satisfaction at Appeals, so he petitioned the Tax Court. The Tax Court concluded that a notice of deficiency had been properly mailed, but he simply had not received it. After a remand to Appeals, a trial was had in the Tax Court in September 2016, and post-trial briefs were later filed. The failure to receive the notice of deficiency allowed the Tax Court to decide de novo his challenge to the underlying tax liability set out therein. Neither in his pretrial nor post-trial briefs did Mr. McLane seek a refund. Before the Tax Court’s ruling on the merits, the IRS later conceded that, for the 2008 tax year, Mr. McLane had proved enough business expenses at trial to not only fully eliminate any deficiency and abate the NFTL, but to also produce an overpayment. In a conference call among the parties and Judge Halpern in February 2018, Mr. McLane first asked for a refund of the overpayment that the IRS now conceded had occurred.

In an order issued on March 13, 2018 — one that did not mention Greene-Thapedi — Judge Halpern asked for memoranda of law from the parties on whether he had jurisdiction to find an overpayment under these facts. UDC filed an amicus memorandum, as well.

In Greene-Thapedi the Tax Court reviewed a CDP case where the IRS had been trying to collect a deficiency arising from a stipulated decision of the Tax Court in an earlier deficiency case involving 1992 income taxes. The dispute in the CDP hearing was only over the amount of interest charged on the stipulated deficiency. But, the IRS offset an overpayment of taxpayer’s 1999 liability to fully pay the 1992 liability pending before the court in the CDP matter. The taxpayer in that CDP case then sought a refund of interest accrued before the notice of intent to levy. The court found that the dispute over the interest was a challenge to the underlying liability, but once the levy became moot by virtue of the offset of the 1999 liability the opportunity to challenge the liability vanished together with any claim for refund. The court also noted in the case that IRC 6330 does not expressly give the Tax Court jurisdiction to determine overpayments and to order refunds. The case contains no discussion of whether the refund claim was timely filed under section 6512(b)(3), which gives the Tax Court the power to find an overpayment under its deficiency jurisdiction under several scenarios.

In the Greene-Thapedi opinion at footnote 19 the Tax Court mentioned the possibility that although not present in that case the determination of an overpayment might be “necessary for a correct and complete determination of whether the proposed collection action should proceed.” Thus, the court gave Mr. McLane some hope that his case might fit within the exception mentioned by the court as a possibility. Both Mr. McLane and the amicus also argued that the Greene-Thapedi case was legally distinguishable, since it involved a dispute over interest on a deficiency that had already been stipulated, whereas the McLane CDP case was the first time the merits of the deficiency were being litigated. Both memoranda argued that a taxpayer who had not received a notice of deficiency should be put in the same position in a CDP challenge to that liability in Tax Court as he would have been had he received the notice of deficiency. The amicus pointed out that one could still apply the Tax Court’s overpayment jurisdiction rules of section 6512(b)(3) by limiting the amount of the refund to both (1) the amount paid in the 3-year (plus extension) period before the notice of deficiency was mailed (a deemed paid claim) and (2) the amount paid after the notice of deficiency. The $957 and $800 payments would fall within those descriptions. Another factor giving Mr. McLane some hope was the dissenting opinion of Judge Vasquez in Greene-Thapedi which invoked the need to broadly construe the court’s jurisdiction because of the remedial nature of CDP. Judge Vasquez also pointed out that the decision created a trap for the unwary:

Taxpayers who choose to litigate their section 6015 [innocent spouse] and section 6404 claims as part of a section 6330 proceeding cannot obtain decisions of an overpayment or refund in Tax Court. If those same taxpayers had made claims for section 6015 relief or interest abatement in a non-section 6330 proceeding, we could enter a decision for an overpayment and could order a refund.

In McLane the court acknowledges that it must revisit Greene-Thapedi to determine if it has overpayment jurisdiction on the facts presented here; however, it concludes that it has no reason to depart from the earlier precedent.

In response to the narrow argument that Mr. McLane and UDC made that the Tax Court has overpayment jurisdiction in a Tax Court case only where the underlying tax liability is at issue because of “the non-receipt of a mailed notice of deficiency,” the court states that:

We see no reason why the issuance of a notice of deficiency that petitioner never received should allow him to pursue a claim for refund that would otherwise have become time barred long before he manifested any awareness of it.

The court reasons that he had plenty of time to notice that he had more expenses than he originally claimed on his 2008 return and he did not act to raise a refund claim until a conference call with the parties in the CDP litigation in February of 2018. By 2018, the normal statute of limitations to file a claim for refund had long since passed. The court expresses concern that providing refund jurisdiction in this context would allow a taxpayer to make an end run around the refund time frames established in the Code. It is unclear how much this late request for a refund may have impacted the outcome of the case. The court does not directly address the argument made by UDC that section 6512(b)(3)’s overpayment jurisdiction filing deadlines (which cover payments made in periods both before and after the notice of deficiency was mailed) could be treated as obviating the need for any amended return in order to seek a refund in the Tax Court CDP case.

The court provides an extensive discussion regarding the arguments of the amicus brief which follow closely the arguments made by Judge Vasquez in his dissent in Greene-Thapedi and the court pushes back on each one of those arguments. I will not repeat them here but I came away with the impression that the length of the opinion may have been influenced by the desire to take this opportunity to refute Judge Vasquez’s dissent in more detail than was done in the majority opinion in Greene-Thapedi and perhaps was done with an eye toward the possible appeal of the McLane case. Of the appellate courts, only the D.C. Circuit (in Willson, a case also with unusual facts not involving a challenge to the underlying liability) has ever discussed or followed Greene-Thapedi. McLane could appeal his case to the Fourth Circuit. In any event several pages of the opinion explain in detail why none of the issues raised by Judge Vasquez provide a basis for Tax Court jurisdiction.

For anyone interested in fighting this issue, the opinion provides a detailed roadmap of what the court thinks of the arguments made to this point. While it appeared that Greene-Thapedi may have left a crack in the door for a taxpayer to come in with different facts and succeed in obtaining a refund in a CDP case, the McLane decision signals that the crack is closed. Any success on this issue must come from persuading a circuit court to interpret the statute differently or for Congress to make clear that its jurisdictional grant goes further than it currently appears to do.

 

 

What is a Prior Administrative Hearing?

In Loveland v. Commissioner, 151 T.C. No. 7 (2018) the Tax Court answered a previously unanswered question necessary in some Collection Due Process cases for determining the scope of the hearing. The court determined that a prior administrative hearing means a hearing before Appeals and that meeting with a revenue officer (and presumably a revenue agent) does not satisfy the language of IRC 6330(c)(4)(A)(i) or Treasury Regulation 301.6320-1(e)(1). The court issued the case in a precedential opinion because of this aspect but it contains other interesting issues as well. The taxpayers brought their case pro se. The court reaches its opinion in the context of a motion for summary judgment.

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The Lovelands present a factual situation quite similar to many clients of low income taxpayer clinics. He retired from working as a boilermaker and she retired after a career as a teacher. The Great Recession significantly impacted their finances in a negative way and each has had a major health issue to deal with. Because of the negative financial and health issues happening in their lives, the Lovelands stopped paying taxes during the years 2011-2014 and accumulated about $60,000 in federal tax debt.

The opinion does not say exactly what they did to accumulate the debt but the fact pattern reminded me of so many formerly middle class clients I saw following the recession who had to dip into their retirement funds to keep afloat. These individuals ended up at the Villanova tax clinic with significant tax liabilities similar to the Lovelands’ and often by that point had lost their jobs, their houses, their cars and had little prospect of repaying the taxes. We saw so many of these cases for a few years that my students threw me a 72(t) party on the day I turned 59 and ½ because they had come to appreciate the significance of all of the exceptions to the 10% excise tax imposed by that Code section.

The IRS sent the Lovelands a notice of intent to levy. They entered into negotiations with a collections officer and sought an offer in compromise. The description in the opinion leads me to believe that they submitted a complete offer package and that they sought a special circumstances offer which would allow them to pay less than what the IRS would calculate as their reasonable collection potential. I suspect that they did this because they had a house or some other asset of value they sought to keep because their health issues would prevent them from borrowing on the house.

The collection officer rejected the OIC finding that they had the ability to fully repay the taxes. They initially appealed the decision; however, they also sought to pursue discussions about an installment agreement (IA). The IRS told them that if they appealed the rejection of the OIC they could not simultaneously negotiate an IA, so they withdrew the appeal of the OIC rejection and continued negotiations with the collection officer about an IA.

While they discussed the IA, the Lovelands sought to borrow about $11,500 against real estate they owned in order to reduce their tax liability below $50,000 so they could qualify for a streamlined IA. On the day they submitted the loan application, the IRS filed a notice of federal tax lien (NFTL) which killed the loan application. They requested a CDP hearing with respect to the filing of the NFTL and requested release of the NFTL so they could obtain the financing to pay the IRS.

The Appeals employee assigned to the CDP case sent them a letter asking for a Form 433-A to support their requested collection alternative. They responded by asking the Appeals employee to take a second look at the OIC which included a completed 433-A (OIC). The Appeals employee declined to consider the OIC or a partial pay IA but she was kind enough to calculate a full pay IA in 84 months which would cost them $853 per month.

The court found that:

On April 7, 2017, the Appeals officer closed the Lovelands’ appeal. On April 11, 2017, a notice of determination was sent to the Lovelands informing them of the Commissioner’s determination and their right to appeal the decision to the Tax Court. The notice states that the Lovelands’ requested the withdrawal of the lien and an installment agreement. The notice also states that the Appeals officer did not consider their proposed installment agreement because the Lovelands ‘did not provide any financial information.’ Neither the notice of determination nor the case history notes discussed Mr. Loveland’s medical condition or the effect of his disability on the Lovelands’ ability to pay the tax liability.

In response to the motion for summary judgment, the Lovelands argued that in giving the Form 433-A (OIC) to the Appeals employee they did submit financial information and they also argued that the NFTL was causing financial hardship.

The court states that:

We are faced with a unique question here: whether negotiations with a collections officer constitute a previous administrative proceeding under section 6330(c)(4)(A)(i)….The Lovelands made an offer-in-compromise in a separate collection proceeding that is not before us. Then, in the CDP hearing underlying this case, they renewed their offer-in-compromise.

The statute says that an issue cannot be raised if “the issue was raised and considered at a previous hearing under section 6320 or in any other previous administrative or judicial proceeding.” In this case the issue does not turn on whether there was a prior opportunity for a hearing as many cases have litigated but rather whether there was a prior proceeding. The court points out that the standard for a prior opportunity differs from whether a prior proceeding occurred. The applicable regulation, 301.6320-1(e)(3), Q&A-E7 explicitly provides that a prior opportunity to dispute the underlying liability precludes consideration of the underlying liability in a subsequent CDP hearing. We have written extensively on that issue here, here and here.

The regulation is “noticeably silent” with regard to “spousal defenses, challenges to the appropriateness of the NFTL filing, and offers of collection alternatives” leaving open the opportunity for taxpayer to raise these issues in a CDP hearing if they did not have a previous administrative hearing. The court then finds that in refusing to consider the OIC requested by the Lovelands the IRS abused its discretion. Similarly, the court finds that it abused its discretion in refusing to consider the partial pay installment agreement and the court took pains to point out that the record did not show any failure on the part of the Lovelands to provide requested information.

The court also found that the Lovelands used words in their communication with the Appeals employee that she should have interpreted as economic hardship giving rise to the consideration of an effective tax administration offer in compromise. Because the Appeals employee never evaluated this claim, the IRS abused its discretion in failing to consider this as well. The court remanded the case to Appeals. One hopes that Appeals can find a way to work with the Lovelands and that their case will not return to the Tax Court.

The case creates new law for taxpayers not arguing the merits of the tax liability by making clear that only a prior administrative hearing and not a prior opportunity for an administrative hearing has a preclusive effect on the collection issues such as spousal defenses, collection alternatives and lien filing that a taxpayer may want to raise in a CDP hearing. It will be interesting to see if the IRS agrees with this legal conclusion by the court or seeks to appeal the issue.

 

Designated Orders – Discovery Issues, Delinquent Petitioners, and Determination Letters (and some Chenery): August 13 – 17

Designated Order blogger Caleb Smith from University of Minnesota Law School brings us this week’s installment of designated orders. Based on reader feedback we are trying to put more information about the orders into the headlines to better assist you in identifying the cases and issues that will be discussed. Keith

Limitations on Whistleblower Cases and Discovery: Goldstein v. C.I.R., Dkt. # 361-18W (here)

Procedurally Taxing has covered the relatively new field of “whistleblower” cases in Tax Court before (here, here and here are some good reads for those needing a refresher). Goldstein does not necessarily develop the law, but the order can help one better conceptualize the elements of a whistleblower case.

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The statute governing whistleblower awards is found at IRC § 7623. In a nutshell, it provides for awards to tipsters (i.e. “whistleblowers”) that provide information to the IRS that result in collection of tax proceeds. The amount of the award is generally determined and paid out of the proceeds that the whistleblowing brought in. On this skeletal understanding, we can surmise that there are at least two things a whistleblower must do: (1) provide a good enough tip to get the IRS to act, and (2) have that action result in actual, collected money.

Goldstein, unfortunately, fails on the second of these grounds. Apparently, his tip was just good enough to have the IRS act (by initiating an exam, proposing a rather large amount due), but not good enough to go the distance and result in any proceeds: Appeals dropped the case as “no change” largely on “hazards of litigation” grounds. And since whistleblower awards are paid out of proceeds, and the proceeds from the tip here are $0, it stands to reason that Mr. Goldstein was not in for a big payday.

So why does Mr. Goldstein bring the case? Because Mr. Goldstein believes there actually were proceeds from the tip and wants to use the discovery mechanisms of Court as a way to get to the bottom of the matter. Or, somewhat as an alternative, Mr. Goldstein wants to use discovery to show that there should have been proceeds collected from his tip.

The Court is not persuaded by either of these arguments, but for different reasons.

The question of whether the tip “should have” led to proceeds (in this case, through the assessment of tax and penalties as originally proposed in exam) is not one the Court will entertain, for the familiar reason of its “limited jurisdiction.” As the Court explained in Cohen v. C.I.R. jurisdiction in a whistleblower case is only with respect to the Commissioner’s award determination, not the “determination of the alleged tax liability to which the claim pertains.” Arguing that the IRS should have assessed additional tax certainly seems like a look at the alleged tax liability and not the Commissioner’s award determination. So no-go on that tactic.

But the question of whether the IRS actually received proceeds that it is not disclosing -and whether a whistleblower can use discovery to find out- is a bit more interesting. Here, Judge Armen distinguishes Goldstein’s facts from two other whistleblower cases that did allow motions to compel production of documents from the IRS: Whistleblower 11099-13W v. C.I.R., and Whistleblower 10683-13W v. C.I.R..

These cases, in which whistleblowers were able to use discovery to compel production both had one simple, critical, difference from Mr. Goldstein’s case: in both of those cases, there was no question that the IRS had recovered at least some proceeds from the taxpayers. In the present case, there were no proceeds, and so an element of the case is missing… and thus is dismissed.

Of course, in the skeletal way I have summarized Mr. Goldstein’s case it all sounds quite circular: Mr. Goldstein thinks there were proceeds, the IRS says there weren’t, and the Court says “well, we’d let you use discovery to determine the amount of proceeds if there were any. But the IRS says there aren’t any, so we won’t let you use the Court to look further.” In truth, the IRS did much more in Goldstein than just “say” there weren’t any proceeds. The IRS provided the Court with exhibits and transcripts detailing that there were no proceeds, because the case was closed at Appeals.

Also, to be fair to Mr. Goldstein, the reports were significantly redacted (they do deal with a different taxpayer, after all, so one must be wary of IRC § 6103, but not to an extent that causes Judge Armen much worry. And it will take more than a “hunch” for the Court to allow petitioners access to the Court or use of discovery powers.

From the outset of a whistleblower case (that is, providing the “tip”) the IRS holds pretty much all the cards. Here, it appears that the tip could well have ended up bringing in proceeds: at least it was good enough that the examiner proposed a rather large tax. Appeals reversed on “hazards of litigation” grounds –not exactly a signal that they completely disagreed some proceeds could ensue. But the whistleblower, at that point, has no recourse in court to second-guess the IRS decision.

End of an Era? Bell v. C.I.R., Dkt. # 1973-10L (here)

I am often impressed with how far the Tax Court goes out of its way to be charitable to pro se taxpayers. I am also often impressed with the Tax Courts patience. This isn’t our first (or second) run-in with the Bells, though hopefully it is the last (at least for this docket number and these tax years). As the docket number indicates, this collection case has been eight years in the making. Like Judge Gustafson, I will largely refrain from recounting the history (which can be found in the earlier orders) other than to say that the Bells have appeared to vary between dragging their feet and outright refusing to communicate with the IRS over the intervening years. This behavior (kind-of) culminated in the Court dismissing the Bell’s case for failing to respond to an order to show cause.

And yet, they persisted.

Even though the case was closed, the Bell’s insisted on their “day in court” by showing up to calendar call in Winston-Salem while another trial was ongoing. And rather than slam the door, which had been slowly closing for the better part of eight years, the Court allowed the Bells to speak their part during a break in the scheduled proceedings. The assigned IRS attorney, “naively” believing that merely because the case was closed and removed from the docket they would not need to be present, now had to scramble and drive 30 miles to court.

Of course, the outcome was pretty much foreordained anyway. The Bell’s wanted to argue now that they had documents that would make her case. Documents that never, until that very moment in the past eight years, were shared with the IRS or court. The Court generously construed the Bell’s comments as an oral motion for reconsideration (which would be timely, by one day). And then denied the motion, via this designated order.

And so ends the saga… or does it?

In a tantalizing foreshadowing of future judicial resources to be wasted, Judge Gustafson notes that the Bells have previously asked about their ability to appeal the Court’s decision. We wish all the best to the 4th Circuit (presumptively where appeal would take place), should this saga continue.

One can be fairly impressed with the generosity and patience of the Judge Gustafson in working with the pro se parties of Bell. Tax law is difficult, and Tax Court judges frequently go out of their way to act as guides for pro se taxpayers through the maze. But that patience is less apparent where the party should know better -particularly, where the offending party is the IRS…

Things Fall Apart: Anatomy of a Bad Case. Renka, Inc. v. C.I.R., Dkt. # 15988-11R (here)

It is a good bet that the parties are sophisticated when the case deals with a final determination on an Employee Stock Ownership Plan (ESOP). It is an even better bet if the Judge begins the order with a footnote that “assumes the parties’ familiarity with the record, the terms of art in this complicated area of tax law, and the general principles of summary-judgment law.” Needless to say, this is not the sort of case where either of the parties could ignore court orders, show up at calendar after the case was closed, and be allowed to speak their part.

And of course, neither parties go quite that far. However, both procedurally and substantively the arguments of one party (the IRS) fall astoundingly short of the mark.

The IRS and Renka, Inc. are at odds about whether an ESOP qualified as a tax-exempt trust beginning in 1998. The IRS’s determination (that it is not tax-exempt) hinged on the characterization of Renka, Inc. as also including a second entity (ANC) as either a “controlled group” or “affiliated service group.” If this was so, then Renka, Inc.’s ESOP also must be set up to benefit additional employees (i.e., those of ANC), which it did not.

I am no expert on ESOPs, controlled groups, or affiliated service groups, and I do not pretend to be. But you don’t have to be an expert on the substantive law to see that the IRS is grasping. Here is where procedure and administrative law come into play.

The Notice of Determination at issue is for 1998. Although the determination also says the plan is not qualified for the years subsequent to 1998, it is really just looking at the facts in existence during 1998, reaching a determination about 1998, and saying that because of those facts (i.e. non-qualified in 1998), it continues to be non-qualified thereafter. But the critical year of the Notice of Determination is 1998: that is the year that Renka, Inc. has been put on notice for, and it is the determination that is reached for that year that is before the Court. So when the Commissioner says in court, “actually, Renka, Inc. was fine in 1998, but in 1999 (and thereafter) it wasn’t qualified” there are some big problems.

The biggest problem is the Chenery doctrine. Judge Holmes quotes Chenery as holding that “a reviewing court, in dealing with a determination or judgment which an administrative agency alone is authorized to make, must judge the propriety of such action solely by the grounds invoked by the agency.” SEC v. Chenery Corp. (Chenery II), 332 U.S. 194 (1947). The IRS essentially wants to argue that the Notice of Determination for 1998 is correct if only we use the facts of 1999… and apply the determination to 1999 rather than 1998. The Chenery doctrine, however, does not allow an agency to use its original determination as a “place-holder” in this manner. Since all parties agree the ESOP met all the necessary requirements in 1998 (the determination year), the inquiry ends: the Determination was an abuse of discretion.

This is one of those cases where you can tell which way the wind is blowing well before reaching the actual opinion. Before even getting to the heart of Chenery, Judge Holmes summarizes the Commissioner’s argument as being “if we ignore all the things he [the Commissioner] did wrong, then he was right.” And although the IRS has already essentially lost the case on procedural grounds (i.e. arguing about 1999 when it is barred by Chenery), for good measure Judge Holmes also looks at the substantive grounds for that argument.

Amazingly, it only gets worse.

First off, the IRS relies on a proposed regulation for their approach on the substantive law (i.e. that the ESOP did not qualify as a tax-exempt trust). Of course, proposed regulations do not carry the force of law, but only the “power to persuade” (i.e. “Skidmore” deference). And what is the power to persuade? Essentially it is the same as a persuasive argument made on brief. Judge Holmes cites to Tedori v. United States, 211 F.3d 488, 492 (9th Cir. 2000) as support for this idea.

As an aside, I have five hand-written stars in the margin next to that point. I have always struggled with the idea that Skidmore deference means anything other than “look at this argument someone else made once: isn’t it interesting?” It is not a whole lot different than if I (or whomever the party is) made the argument on their own in the brief, except that the quote may be attributed to a more impressive name.

But if there is something worse than over-relying on a proposed regulation for your argument, it would be over-relying on a proposed regulation that was withdrawn well before the tax year at issue. Which is what happened here, since the proposed regulation was withdrawn in 1993. Ouch.

Finally, and just to really make you cringe, Judge Holmes spends a paragraph noting that even if the proposed regulation was (a) not withdrawn, and (b) subject to actual deference, it still would not apply to the facts at hand. In other words, the thrust of the IRS’s substantive argument was an incorrect interpretation of a proposed regulation that was no longer in effect. No Bueno.

There was one final designated order that I will not go into detail on. For those with incurable curiosity, it can be found here and provides a small twist on the common “taxpayers dragging their feet in collections” story, in that this taxpayer was not pro se.

 

Designated Orders: 8/6/18 to 8/10/18

William Schmidt of the Legal Aid Society of Kansas brings us this week’s designated order post. The case discussed involves a mystery regarding how the IRS made the assessment that led to the filing of the notice of federal tax lien that led to the collection due process case. There may be more orders yet to come in this case. Because the case is scheduled for trial next month in Denver, perhaps Samantha Galvin, another writer of designated order posts and one of the clinicians working in Denver, will have personal knowledge of the case. Keith

For the week of August 6 to 10, there were two designated orders from the Tax Court so this posting will be briefer than usual. It is unclear if this is a week where summer vacations took their toll. Both orders examined are from the same case so the analysis will include all the orders for the week.

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Docket No. 6161-17 L, Debra L. March v. C.I.R.

The Court provided 2 orders in this case starting from IRS Appeals issuing a determination to sustain the filing of the notice of lien for the collection of income tax for tax years 2009 and 2010.

Petitioner had a prior collection due process (CDP) case, Docket No. 10223-14, resulting from a notice of intent to levy. In the prior case the IRS issued a notice of determination sustaining the levy and the petitioner filed a Tax Court petition in which it challenged the validity of the assessment. The parties to that case entered into a stipulated decision on June 25, 2015, that did not sustain Appeals’ determination. The decision document stated that the IRS would abate the liability for tax year 2009 on the basis that the IRS failed to send the statutory notice of deficiency (SNOD) to the petitioner’s last known address. The Court, in the current case, states that it assumes the IRS complied with the decision entered in the prior case and made the abatement.

At issue in this week’s designated order is how the IRS came to have an assessment against the petitioner after the abatement of the prior assessment. The case presents a very curious situation; however, the order does not resolve the mystery but rather seeks to have the parties, particularly the IRS, explain how to resolve it.

At some point after the “presumed abatement” of the 2009 assessment following the first CDP case in Tax Court, the IRS appears to have reassessed the 2009 liability and filed a notice of lien on that 2009 liability. Appeals issued a notice of determination on February 6, 2017. The notice of determination states that the original assessment was abated (due to the wrong address on the notice of deficiency) and the taxpayer was given additional time to file an original tax return. Since the taxpayer continued not to file the return for 2009, the IRS reinstated the assessment. The problem with the verification is that how the IRS reinstated the assessment remains entirely unclear. It seems clear that the taxpayer did not consent to the reassessment by filing a tax return. What remains unclear is what the IRS did to acquire authority to reassess.

The language of the Settlement Officer in the notice of determination contains only a vague statement regarding the basis for the new assessment. For verification, the notice of determination states: “The Settlement Officer verified through transcript analysis that the assessment was properly made per IRC section 6201 for each tax and period listed on the CDP notice.” Ms. March timely petitioned the Tax Court on March 6, 2017 with the new CDP case again contesting the assessed liability.

The Court then analyzes code section 6201. Section 6201(a)(1) authorizes the IRS to assess “taxes…as to which returns…are made” though Ms. March has yet to file a return for 2009. The Court states that the other provisions for making an assessment do not seem to apply beyond the authority for the IRS to determine a deficiency, mail the taxpayer a SNOD, and assess the deficiency upon the passage of 90 days following the mailing (unless the taxpayer files a timely petition with Tax Court). But, the parties stipulated in that prior case that no SNOD was properly mailed, and the notice of determination appears to indicate no SNOD was mailed subsequent to the conclusion of the first Tax Court case.

The Court would like an explanation for the authority the IRS had to “restore the tax assessment.” The Court’s order is for the IRS to file a status report explaining the position about the validity of the 2009 income tax underlying the lien filing at issue in the case.

Takeaway: The IRS looks to have been caught making another bad assessment and then providing an alleged verification that fails to verify the proper statutory procedure for making an assessment. Perhaps they will have a suitable explanation or be able to cite different authority. Either the IRS “reinstated” the assessment without statutory authority for doing so or the Settlement Officer did not know how to write the verification section of the CDP determination and explain a statutory basis for the new assessment. In either case the IRS does not look good but if the IRS simply “reinstated” the assessment as the Settlement Officer describes, it appears the IRS is headed for its second CDP loss with respect to the same taxpayer for the same year for the same problem. Under the circumstances, the IRS attorney might also have noticed this issue before it got in front of a judge a second time. Tough. 

The Court discusses an IRS motion to show cause regarding why proposed facts and evidence should not be accepted as established. This order relates to a routine Rule 91(f) motion requiring a party to stipulate. Because the petitioner is unrepresented, the judge explains in the order how stipulations can be used to include evidence that a self-represented petitioner such as Ms. March would otherwise have to introduce at trial on her own. The judge also explained that Ms. March would not be prevented from introducing additional evidence beyond what was including in the stipulated evidence. The order provides an example of a typical Tax Court order to a pro se taxpayer in which the Court provides a simple, straight-forward explanation of the rules and why the unrepresented individual should comply for their own best interest. While this order uncoupled from Order 1 discussed above would not deserve designated order status, it offers a glimpse of a routine order issued in Tax Court cases to pro se petitioners uncomfortable with the stipulation process for fear of stipulating themselves out of court.

After providing the careful explanation for the benefit of the petitioner, the Court granted the IRS motion to show cause and ordered that the petitioner file a reply on or before August 27. If no response is provided, the Court will issue an order accordingly.

Takeaway: While the Court is reasonable in explaining to an unrepresented petitioner the process of stipulations, the Court also does not stray from the rules or let that delay the upcoming trial (September 24 in Denver).

 

 

Designated Orders 7/16 – 7/20

Caleb Smith from the University of Minnesota brings us this week’s designated orders. The parade of orders involving Graev continues and Professor Smith explains the evidentiary issues present when the IRS seeks to enter the necessary approval form after reopening the Tax Court record. Professor Smith also provides advice, based on another order entered this week, on how to frame your CDP case. A non-procedural matter that might be of interest to some readers is ABA Resolution 102A passed this week, urging Congress to repeal the repeal of the alimony deduction. For those interested in this issue, the resolution contains much background on the deduction.  Keith

Submitting Evidence of Supervisory Approval Post-Graev III

Last week, William Schmidt covered three designated orders that dealt with motions to reopen the record to submit evidence of supervisory approval under IRC 6751. I keep waiting for this particular strain of post-Graev III clean-up to cease, but to no avail: the week of July 16 two more designated orders on issues of reopening the record were issued. Luckily, there are important lessons that can be gleaned from some of these orders on issues that have nothing to do with reopening the record (something that post-Graev III cases shouldn’t have to worry about). Rather, these cases are helpful on the evidentiary issues of getting supervisory approval forms into the record in the first place.

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Choosing the Right Hearsay “Exception” Fakiris v. C.I.R., dkt. # 18292-12 (here)

In Fakiris, the IRS was once again confronted with the issues of (1) reopening the record to get supervisory approval forms into it, and (2) objections to those forms on hearsay grounds. At the outset (for those paying attention to docket numbers), one may be forgiven for wondering how it is even possible that this case was not decided well before Graev III. The briefing in Fakiris was completed in August, 2014 with no apparent court action until June, 2017. Judge Gale walks us through the procedural milestones in a footnote: although a decision was entered for the IRS about a year ago in T.C. Memo. 2017-126, the IRS filed a motion to vacate or revise (surprisingly, since they appear to have won on all fronts). The decision that the IRS sought to vacate includes a footnote (FN 20) providing that because petitioner did not raise a 6751 issue, it is deemed conceded. At the time, there was some uncertainty about whether the taxpayer had to affirmatively raise the issue, or whether it was a part of the IRS’s burden of production under Higbee. See earlier post from Carl Smith.

In any event, and no matter how old the case may be, it is still before the Court and the record must still be reopened for the IRS to succeed on the IRC 6751 issue. After the usual explanation of why it is proper for the Court to exercise its discretion to reopen the record, we arrive at the evidentiary issue: isn’t a supervisory approval form hearsay? At least so objects petitioner.

Where petitioners object to IRS supervisory approval forms as “hearsay” it appears to be the standard operating procedure of IRS counsel to argue the “business records” exception (see FRE 803(b)). Generally, the IRS prevails on this theory, but this theory creates potentially needless pitfalls. Fakiris demonstrates those pitfalls, noting that under the business record exception the IRS has certain foundational requirements it must meet “either by certification, see 902(11), Fed. R. Evid. [here], or through the testimony of the custodian or another qualified witness, see Rule 803(6)(D), Fed. R. Evid.” Without that foundation, the business records exception cannot hold -and indeed, in Fakiris the IRS lacks this foundation and is left spending more time and resources to go back and build it as their proffered evidence is excluded from the record.

So how does one avoid the time-consuming, perilous path of the “business exception?” Judge Gale drops a rather large hint in footnote 9: “We note that Exhibits A and B [the actual penalty approval forms] might also constitute “verbal acts”, i.e., a category of statements excluded from hearsay because ‘the statement itself affects the legal rights of the parties or is a circumstance bearing on conduct affecting their rights.’” If it is a “verbal act” it is categorically not hearsay (and not an “exception” to the hearsay rule). I have made exactly this argument before, although I referred to verbal act as “independent legal significance.” I am surprised that the IRS does not uniformly advanced this argument. In the instances that the IRS used it, the IRS has prevailed (as covered in the designated orders of the previous week). Judge Gale also refers to the advisory committee’s note to bolster the argument that the supervisory approval form is not hearsay: “If the significance of an offered statement lies solely in the fact that it was made, no issue is raised as to the truth of anything asserted, and the statement is not hearsay.” Advisory Committee Note on FRE 801(c) [here]. To me, that is what appears to be happening here. The IRS is simply trying to prove that a statement was made (i.e. a supervisor said “I approve of this penalty.”) The penalty approval form is that statement. It is absurd to think that the form is being offered for any other purpose (e.g. as evidence that the taxpayer actually was negligent, etc.).

If you don’t believe me (or Judge Gale), perhaps Judge Holmes will change your mind? In a designated order covered last week in Baca v. C.I.R., the IRS prevails on a theory that the supervisory approval form is a verbal act, without relying on the business exception. In reaching that determination, Judge Holmes references not only the FRE advisory committee note on point, but also Gen. Tire of Miami Beach, Inc. v. NLRB, 332 F.2d 58 (5th Cir. 1964) providing that a statement is a nonhearsay verbal act if “inquiry is not the truth of the words said, merely whether they were said.”

If you just aren’t sold on the “verbal acts” argument, Judge Gale’s Footnote 9 has yet more to offer. As a second possible avenue for getting the penalty approval form into evidence, Judge Gale suggests the public records exception of FRE 803(8). This exception to hearsay requires proper certification, but apparently has been successfully used by the IRS in the past with Form 4340 (See U.S. v. Dickert, 635 F. App’x 844 (11th Cir. 2016)).

All of this is to say, I think the IRS has ample grounds for getting the supervisory approval form properly into evidence. For petitioners, though it is likely a losing argument, if there are actual evidentiary concerns you must be sure to properly raise those objections -even if in the stipulation of facts. A second designated order issued the same week as Fakiris (found here) does not even get to the question of whether the forms are hearsay after reopening the record -presumably because the objections were never raised (the docket does not show a response by petitioner to the IRS’s motion to reopen the record).

Setting Yourself Up for Favorable Judicial Review on CDP Cases: Jackson v. C.I.R., dkt. # 16854-17SL (here)

Taxpayers that are unable to reach an agreement with the IRS on collection alternatives at a Collection Due Process (CDP) hearing generally have an uphill battle to get where they want to go. Yes, they can get Tax Court review of the IRS determination, but that review is under a fairly vague “abuse of discretion” standard. Still, there are things that petitioners can do to better situate themselves for that review.

At an ABA Tax Section meeting years ago, a practitioner recommended memorializing almost everything that is discussed in letters to IRS Appeals. Since the jurisdiction I practice in is subject to the Robinette “admin record rule,” it is especially important to get as much as possible into the record. Conversely, one may argue that the record is so undeveloped that it should be remanded because there is nothing for the Court to even review: see e.g. Wadleigh v. C.I.R., 134 T.C. 280 (2010). The order in Jackson provides another lesson: how to frame the issue before the Court.

In Jackson, the taxpayers owed roughly $45,000 for 2012 – 2015 taxes due to underwithholding. After receiving a Notice of Intent to Levy, the Jacksons timely requested a CDP hearing, checking the boxes for “Offer in Compromise,” “I Cannot Pay Balance,” and “Installment Agreement” on their submitted Form 12153. Over the course of the hearing, however, the only real issue that was discussed was an installment agreement -albeit, a “partial pay” installment agreement (PPIA). A PPIA is essentially an installment agreement with terms that will not fully pay the liability before the collection statute expiration date (CSED) occurs.

Obviously, the IRS is less inclined to accept a PPIA than a normal installment agreement, because a PPIA basically agrees to forgive a part of the liability by operation of the CSED. Sensibly, IRS Appeals required a Form 433-A from the Jacksons to determine if a PPIA made sense.

The Form 433-A submitted by the Jacksons appears to have pushed the envelope a bit. Most notably, the Jacksons claimed $740 for monthly phone and TV expenses (the ultra-deluxe HBO package?) and $629 per month in (voluntary) retirement contributions as necessary expenses. The settlement officer downwardly adjusted both of these figures (and possibly others) pursuant to the applicable IRM, and determined that the Jacksons could afford to pay much more than the $300/month they were offering. Going slightly above and beyond, the settlement officer proposed an “expanded” installment agreement (i.e. one that goes beyond the typical 72 months) of $1,100 per month. The Jackson’s rejected this, but appear to have proposed nothing in its stead. Accordingly, the settlement officer determined that the proposed levy should be sustained.

Judge Armen notes that with installment agreements (as with most collection alternatives under an abuse of discretion standard of review), “the Court does not substitute its judgment for that of the Appeals Office[.]” Sulphur Manor, Inc. v. C.I.R., T.C. Memo. 2017-95. If the IRS “followed all statutory and administrative guidelines and provided a reasoned, balanced decision, the Court will not reweigh the equities.” Thompson v. C.I.R., 140 T.C. 173, 179 (2013).

The Thompson and Sulphur Manor, Inc. cases provide, in the negative, what a petitioner must argue for any chance on review. Starting with Sulphur Manor, Inc., the petitioner must strive to present the question as something other than a battle of who has the “better” idea. In other words, don’t frame it as a battle of bad judgment (IRS Appeals) vs. good judgment (petitioner). If it must be a question of judgment, then Thompson gives the next hint on how to frame the issue: not that the IRS exercised “bad” judgment, but that they didn’t provide any reasoning for their decision in the first place (i.e. that they did not “provide a reasoned, balanced decision”). A lack of reasoning is akin to an “arbitrary” decision, which is by definition an abuse of discretion.

Better than framing the determination as lacking any reasoning, however, is where the petitioner can point to “statutory and administrative guidelines” that the IRS did not follow. Of course, this is difficult in collection issues because there are generally fairly few statutory guidelines the IRS must follow in the first place. But administrative guidelines do exist in abundance, at least in the IRM. Of course, this cuts both ways: the IRM can also provide cover for the IRS when it is followed, but appears to get to an unjust outcome.

Returning to the facts of Jackson, the petitioner faced an extremely uphill (ultimately losing) battle. It is basically brought before the Court as a request for relief on the grounds that the taxpayer just doesn’t like what the IRS proposes. As Judge Armen more charitably characterizes the case, by failing to engage in further negotiations with Appeals on a proper amount of monthly installment payments, “petitioners framed the issue for decision by the Court as whether the settlement officer, in declining to accept their offer of a partial payment installment agreement in the monthly amount of $300, abused her discretion by acting without a reasonable basis in fact or law.” This is asking for a pretty heavy lift of the Court, since there is no statute that provides the IRS must accept partial pay agreements, and the facts show the IRM was followed by the IRS. Not surprisingly, the Court declines to find an abuse of discretion.

Odds and Ends: Remaining Designated Orders

End of an Era? Chapman v. C.I.R., Dkt. # 3007-18 (here)

The Chapmans appear to be Tax Court “hobbyists” -individuals that enjoy making arguments in court more than most tax attorneys, and generally with frivolous arguments. The tax years at issue (going back to 1999) have numerous docket numbers assigned to them both in Tax Court and the 11th Circuit, all with the same general take-away: you have no legitimate argument, you owe the tax. But could this most recent action be the secret, silver bullet? Could this newfound argument, that they are not “taxpayers” subject to the Federal income tax when the liability is due to a substitute for return, be their saving grace?

Nope. All that argument does is get them slapped with a $3,000 penalty under IRC 6673(a). One hopes this is the end of the saga.

The Vagaries of Partnership Procedure: Freedman v. C.I.R., dkt. # 23410-14 (here)

Freedman involves an IRS motion to dismiss for lack of jurisdiction the portion of an individual’s case that concerns penalties the IRS argues were already dealt with in a prior partnership-level case. For a fun, late-summer read on the procedures under TEFRA for assessment and collection against a partner, after a partnership-level adjustment, this order is recommended.

 

When Does the Period Begin for Filing a CDP Request?

I previously blogged the case of Weiss v. Commissioner in which the taxpayer argued that the date on the Collection Due Process (CDP) Notice controlled the period for making a CDP request. Les provided an update on the case that included the oral argument and the briefs. The D.C. Circuit issued its opinion, an unpublished per curiam, on May 22, 2018, affirming the decision of the Tax Court but not without some criticism of both parties.

As a reminder about the case and to set up the language of the Circuit decision, the taxpayer owes a substantial amount of tax for many periods. Three bankruptcy cases suspended the statute of limitations on collection. Near the end of the statute of limitations, a revenue officer made a personal visit to the home of Mr. Weiss to deliver the CDP Notice. The RO dated the notice he expected to deliver during the visit; however, the RO did not go up to the door and deliver the notice because a dog of sufficient size and ferocity made him think better of personal delivery. Instead, the RO returned to his office and mailed the notice. He did not get around to mailing the notice until two days after the date on the notice.

Mr. Weiss filed a CDP request within 30 days of the date on which the notice was actually mailed but more than 30 days after the date on the notice. He argued that his request should be treated as a request for an equivalent hearing which does not suspend the statute of limitations on collection and the IRS argued that the actual date of mailing controls which meant that his request for a CDP hearing was timely and suspended the statute of limitations on collection. The consequence of a statute suspension was that a suit brought by the IRS was timely filed. The Tax Court agreed with the IRS that the date of actual mailing controls but had some sharp words for both parties.

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When requesting a CDP hearing or an equivalent hearing, the IRS asks that the taxpayer file a Form 12153. The form contemplates that if filed within 30 days of the CDP notice the taxpayer will receive a CDP hearing with full rights and if filed after that time but within one year of the CDP notice the taxpayer will receive an equivalent hearing. Although the form does not contemplate the option, it seems possible that a taxpayer could make a request for an equivalent hearing during the first 30 days by stating that request. Because of the suspension of the statute of limitations that accompanies a CDP hearing and because of the low likelihood of success in court on those cases, good reason exists to want an equivalent hearing in some circumstances.

Here, the taxpayer argues that he wanted an equivalent hearing and he thought he would get one based on the timing of his request. In my experience the IRS regularly puts dates on its letters, not just CDP notice letters, that do not correspond to the date on which the IRS mails the letter. Weiss tells you not to rely on the date of the letter as the meaningful date. For taxpayers seeking an equivalent hearing in this context, it would seem that a clear statement that an equivalent hearing is sought plus waiting for a couple of weeks after the 30 day period ends from the date on the CDP notice would be the best practice. The D.C. Circuit, while agreeing that the language of the statute dictates using the date of mailing rather than the date on the letter, had some pretty sharp words for the IRS and its practice of putting a date on the letter that was not the actual date of mailing:

Nonetheless, in spite of the unappealing proposition that we must side either with a taxpayer deliberately attempting to manipulate the Code to prevent paying his own taxes or a government agency that seems not to care whether it provides the citizenry with notice of their rights and liabilities, we must decide whether the date on the notice or the date of mailing governs. The taxpayer’s position has the advantage of common sense. But the government’s position has the insurmountable advantage of compliance with the language of the statute. That is to say, what the statute requires is “the notice . . . shall be . . . sent by certified or registered mail, return receipt requested . . . not less than thirty days before the date of the first levy. . . .” (emphasis added). In this case, the undisputed evidence is that the notice was “sent,” that is mailed, no more than thirty days before Weiss’s March 14 mailing. Therefore the statute was tolled.

We note in parting the court’s hope that few taxpayers will be as anxious as Weiss to manipulate the law in order to attempt to extinguish tax liabilities. We further hope that few agencies will be as careless with dates and especially with the rights of the citizens as the IRS in this case. Nonetheless, unattractive as the position of the IRS may be, it does comport with the language of the statute and the apparent meaning of the word “send.” We therefore affirm the decision of the Tax Court.

Congress could fix this problem, and others regarding CDP notices, by requiring the IRS to put a date on the letter by which the taxpayer should file the request and providing that the taxpayer could rely on that date or on the later date of actual mailing. There were enough problems with notices of deficiency that Congress addressed the situation in that context in 1998 at the same time it created the CDP process; however, it failed to give taxpayers seeking CDP relief the same benefit as those seeking relief in the deficiency context.