Continuances in the Age of Remote Trials: Designated Orders, October 5 – 9, 2020

Months ago, I heard an interview with the NYU Professor Scott Galloway about what the world may look like post-Covid. One of the main takeaways was to think of the pandemic not as a “change agent,” but rather as “accelerant” of trends that were already underway. I’d say this holds true with the government embrace of technology in tax controversy: from the momentous leap of fax to email, to the ability to sign documents electronically (see posts here and here).

While many of these changes were long overdue and will likely remain post-Covid, not all of these changes are here to stay. Or at least not in their current form. Virtual Tax Court trials are a good example of one such change that will almost certainly not remain as the default but may well continue in some form or another. The ease of access for virtual trials (and thus its ability to efficiently resolve cases) may be too attractive to the Tax Court to abolish it altogether.

One question is how or if such changes may affect motions for continuance. To get a sense of what may happen in the future, let’s take a look at the past. Specifically, two designated orders denying such motions in calendared virtual trials.

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Tax Court Rule 133 provides that continuances are “granted only in exceptional circumstances.” While this may make it seem that continuances are extraordinarily rare, in my experience the Tax Court is generally amenable to them so long as either (1) there is a serious prospect the case will resolve without trial, or (2) the parties can demonstrate they are making progress on the case, which would make for a more resolution (be it by trial or otherwise). When I draft continuance motions, I generally try to hit on those two points, demonstrating why it is in the Tax Court’s interest (ultimately, as a matter of efficiency) to grant the continuance.

If you cannot show that you are actively engaged in the case and making a good faith effort to move things forwards the Tax Court is unlikely to grant a continuance motion. Call me a cynic, but I’d venture there are some petitioners out there that would rather have their case languish than hear what the court has to say about their case.

But perhaps the reason things have stalled are out of your control. In my experience, this sometimes arises from logistical issues in receiving the administrative file from the IRS. As I’ve detailed before, the contents of the administrative file can be a sticky issue, and also directly informs many arguments you may want to raise. (The ABA Tax Section also recently held a free webinar on the topic, which I’d highly recommend.)

Bringing things back to virtual trials, petitioners may be inclined to argue for continuances based on technological issues beyond their control. Though it is generally difficult to argue, ahead of the calendar, that you “anticipate” technological trouble that would preclude attending virtual trials, some of these may be legitimate. Where the parties have time-and-time again failed to engage or exhibit other delay tactics, however, the Tax Court is sure to look with a critical eye on these sorts of arguments. The two designated orders give, I believe, excellent examples of the limits of Tax Court patience in granting continuances.

Let’s start with Griggs v. C.I.R., Dkt. # 18035-16 (order here). First off, glancing at the docket number informs us that this case has been circulating since 2016. For context, at that time very few people on earth knew what a “coronavirus” was, and Barack Obama was handing over the keys to the White House to Donald Trump. Suffice it to say, 2016 was a while ago.

Flash forward to October, 2020 and Mr. Griggs still wants more time to get things in order. And for a while, where it seemed the case may be moving forwards, the Tax Court obliged. A continuance was granted in January 2018 after a motion for partial summary judgment by petitioners was denied. Then another continuance was granted in November 2018. Then partial summary judgment granted to the IRS…

After that, Mr. Griggs seemed less inclined to move things towards a final resolution. First, he makes numerous requests for additional time (not to be confused with continuances: see Rule 25(c)) on filing status reports. Then, almost exactly one month before the case is set for trial, Mr. Griggs moves again for a continuance. His reasons fall within the “circumstances outside my control” category: (1) the law libraries in Oregon are closed because of the pandemic, and (2) the forest fires will (somehow) keep him from attending the trial.

The Tax Court isn’t having it. The first reason is unpersuasive because it is apparently a pure substantiation case, where legal research isn’t really in play. The second reason is unpersuasive because… well, you have to actually explain why all the bad-things happening in the world specifically effect you, rather than just listing off Billy Joel style those bad things in the abstract. Mr. Griggs does not do so.

The motion is denied. Maybe our second petitioner (Ononuju v. C.I.R., Dkt. # 22414-18 (here) has better luck?

From the outset it may appear that Mr. Ononuju has a compelling case for continuance. He lives in Nigeria and, because of the pandemic cannot get a flight into the United States. Of course, since this trial is going to be virtual it doesn’t much matter where he physically is, so long as he has phone or internet access. But perhaps such access is lacking in Nigeria?

Not so, the Tax Court finds -or at least not in Mr. Ononuju’s instance. Some reasons why “I’m in Nigeria” is not sufficient, on its own, to show lack of remote access include (1) he lives in the capital city, which certainly has phone access, and (2) he was able to communicate with the IRS by phone and email while in Nigeria (where he has lived since 2017) up to then. The Tax Court is not swayed and is particularly dismayed that Mr. Ononuju didn’t even try to show up to trial and express his concerns with phone or email access so that arrangements could be made.

In my experience, the Tax Court is very understanding when these issues are expressed in good faith. And reading between the lines, the “good-faith” of Mr. Ononuju seems to be called into question here. Although Mr. Ononuju doesn’t show up for trial, his wife does and testifies that he was presently providing medical care in rural areas to people in need.

How noble! Only the Tax Court doesn’t find her testimony credible, so maybe not. A very brief look at taxes at issue might give some hints as to the credibility gaps.

Mr. Ononuju founded and was president of the non-profit “American Medical Missionary Care, Inc.” Again, how noble! Except, at least according to the IRS, Mr. Ononuju engaged in “excess benefit transactions” under IRC § 4958. I don’t work with non-profit tax issues, but under IRC § 4958(c), these appear to be transactions where someone with control over the non-profit uses the non-profit for undue personal gain. The penalties are stiff: a 25 percent excise tax on the prohibited transaction under the “first-tier,” and a 200 percent(!) second tier excise tax if you don’t correct the excess benefit transaction -which apparently Mr. Ononuju never did. I have no insight on whether these taxes were appropriate, or the merits of the case generally, but things seem to have been unraveling for Mr. Onounju: Michigan revoked his medical license at about the same time the IRS examination appeared to be going on.

The IRS asserted a deficiency of over $1.5 million for 2014. Usually that’s a large enough number to keep people engaged. And though Mr. Ononuju was for a time, that appears to have stopped right when the parties got to fact stipulation. After that, radio silence…

Much of Tax Court litigation occurs without the active involvement of the Tax Court itself. Unlike in federal district court, the parties are mostly entrusted to work out the facts between themselves without formal discovery -or at least try to, before getting the court involved. Trial can then largely be reserved to those factual issues the parties could not (reasonably) agree on. But woe onto those who do not engage in the stipulation process, and then ask the Tax Court to postpone the trial. That the (eventual) trial will be virtual doesn’t really play into that equation.

And so we have yet another denied motion for continuance.

To me, virtual trials will just be an extra tool in the Tax Court toolbox: one that could especially benefit places like Minnesota, where the trials are infrequent. As the Tax Court shifts back to on-site calendars, however, I think the possibility of virtual trials could be reason for the Tax Court to be more comfortable in granting continuances -so long as the petitioner is engaged in the process. Imagine the petitioner shows up to calendar after largely being uncommunicative and makes a motion for continuance that very day. Maybe they have a lot of really good reasons for being uncommunicative, and maybe it seems like their case has some merit. In places like Minnesota, Tax Court judges are in a bit of a bind in those instances. If they grant the motion to continue it might not be set for trial for another 6 months to a year. Usually, the Tax Court puts the case on “status report” track to try and keep the parties engaged in the interim.

Virtual trials could go one step further, particularly for those parties that are actually engaged in the process, and perhaps even more so for those that are linked with pro bono counsel at calendar call. Now, instead of scrambling to put together a case that day or week, theoretically pro bono counsel could make a motion for continuance with the understanding that a virtual trial will be held in two or three months -usually enough time to actually sort things out, without being so far in the distance that one of the parties disappears.

For petitioners like Mr. Griggs and Mr. Ononju where continuances may just be a tactic of indefinite delay, they can and should be denied -virtual trial or not. But for engaged petitioners that just need some more time (or assistance from free counsel), the availability of virtual trials may actually provide more cushion for continuances to be granted -at least from the perspective of efficiently resolving cases.

Accepting Gifts from the IRS: Ethical Considerations (Part Two)

Previously, we discussed the two categories of IRS “gifts” that taxpayers cannot accept: clerical gifts and purely computational gifts. We left, however, with the cliffhanger that computational gifts may become “conceptual” gifts, which attorneys often can accept. Today, we’ll look closer at what a conceptual gift is and whether it is what was at issue in the Householder case (covered here).

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Conceptual Gifts

Each step away from the strictly arithmetic computational gift takes you closer to the conceptual. Facts and circumstances are critical in determining which category the gift best falls into. So much of tax calculation involves the interplay of disparate statutes and facts, which may or may not have been explicitly covered in the settlement and negotiation. What first appears to be a matter of computation can often be a matter of concept: for example, the failure of the IRS to raise an issue that at first seemed ancillary but ultimately is determinative.

For example, imagine you are settling a deficiency case where your client filed their return late. Both parties have agreed on the deficiency amount, but never really discussed (or settled on) the exact date the return was filed. The IRS prepares a settlement document that reflects the deficiency agreed on but has a lower IRC § 6651(a)(1) late-filing penalty than you expected. Is this a computational error or a conceptual error?

At first blush, failure-to-file penalties seem like basic arithmetic: essentially, you look at the total amount of tax that should have been reported (and paid) and multiply that by 5% for each month the return is late. In the above hypothetical you’ve reached a determination of the amount of tax that should have been reported when you settled on the deficiency amount. But it isn’t clear that you ever discussed or determined exactly when the return was filed -that is, how late the return is, and by consequence how many months the penalty applies. That value could be subject to reasonable dispute. Exactly when a return is “filed” can be contentious. If the return was truly “late-filed” the issue would be when the IRS received it… but even that date isn’t always clear, especially post-Fowler (see coverage here).

Reverse engineering the late-filing penalty calculations may help in this case: how many months does the penalty amount proposed by the IRS equal? Is it a mathematically impossible number under the statute? (IRC § 6651(a)(1) rounds each fraction to a full month, so if you are 32 days late it is the equivalent of two months.) If so, it is likely a computational error.

Likely a computational error. But not definitely.

Again, conceptual errors may linger behind even the most seemingly mathematical mistakes. The IRS could conceivably have decided on a penalty amount that doesn’t immediately appear to add-up. For example, maybe the parties agree that the return was three months late, but the IRS believes there are significant hazards of litigation on a “reasonable cause” argument. In that case, the IRS may settle on a penalty that doesn’t otherwise make mathematical sense: a penalty of only 60% of the amount due for a three month-late return, accounting for the 40% chance that the petitioner may prevail on a reasonable cause argument in court.

The thing is, as a matter of negotiation the IRS pretty much always has discretion to settle on dollar amounts that won’t “make sense” in a winner-takes-all application of the Code. Left unbounded, the unscrupulous tax attorney could always say, “it wasn’t an arithmetic error: they were just scared I might win!” This line of argument should not always be availing. Whether an attorney can shoehorn a computational error into the conceptual category depends on the facts and circumstances of the case at issue, and the actual conduct of the parties in reaching their settlement.

First though, it is important to recognize why tax attorneys may be so tempted to categorize gifts as “conceptual” in the first place. The biggest reason? These are the gifts you can (in some sense, “must”) accept from the IRS. They are (generally) client confidences that do not raise to the level of misrepresentation to the court. Unless the client wants you to disclose the issue, you shouldn’t. Admittedly, different people in the tax world have different views on your responsibilities to the client and tax administration more broadly. The 2020 Erwin Griswold Lecture gives an interesting overview of the opinions of some prominent tax personalities on that point.

ABA Statement 1999-1 uses the example of a Schedule C deduction to illustrate. In the example the parties eventually agree that the deduction should be allowed, but counsel for the taxpayer believes (secretly) that the deduction likely should be due to passive activity under IRC § 469, and therefore wouldn’t benefit the client. The IRS doesn’t raise this issue, and neither does counsel. ABA Statement 1999-1 advances this as a “conceptual” error: counsel must not disclose unless their client expressly consents to their doing so.

To me, this is a roundabout way of asking whether the conceptual error might not be an “error” at all. As the ABA Statement notes, passive activity issues are highly factual and “subject to some reasonable dispute.” That seems less like a conceptual “error” on the IRS’s point, and more like a conceptual “weakness.” In the ABA’s example the wiggle room is in the reasonable dispute on a highly factual question of law. But that isn’t always how conceptual errors work, particularly when you “know” the key facts at issue.

For example, imagine the IRS audits your client claiming their niece as a qualifying child for the Earned Income Tax Credit. All the IRS is putting at issue is whether the niece lived with your client. Later in the process, you learn that the real problem with your client’s return is that they are legally married and needs to file married filing separate (which disallows the EITC). The IRS, however, doesn’t think to raise this issue. Note that this is essentially what happened in Tsehay v. C.I.R., discussed here. Even though that may be a “conceptual” error you still are not completely off the hook. I would argue that you cannot enter a decision with the court failing to correct that mistake. Recall your obligations to the court under MRCP 3.3 and note especially Rule 3.3(a)(2): the prohibition on failing to disclose adverse controlling legal authority.

In sum, the only time you may be completely free is where it is a conceptual “weakness” rather than an outright error: those instances where you could argue “maybe, just maybe, it wasn’t a mistake at all.” Let’s see if that’s what happened with the Householders.

As Applied to the Householders

The gift to the Householders was in the form of a very messy Notice of Deficiency. Most pertinently, it involved the transformation of a gain (reported by the taxpayer) into a rather large, favorable loss that never seems to have been claimed by the taxpayer at all. The Notice of Deficiency explanation illustrates the confusion: “It is determined that the amount of $317,029 claimed on your return as a loss resulting from the sale of your business is allowable.” The problem is that loss was not claimed on the return.

How did this mistake come to be? Was it from dueling legal theories for calculating the gain on the sale? I am operating from imperfect information, but the order would suggest otherwise. The working theory is that the IRS revenue agent was looking at an unsigned Form 1040 that had been submitted during examination negotiations, and not the actual Form 1040 that had been filed.

One may be tempted to call this a “clerical” mistake: a typo transposing numbers from the actual filed return and one that was just floating in the revenue agent’s file. But one can also imagine facts that would shift this into the world of “conceptual” errors. If there was a return floating around the revenue agent’s file that took the position there was a $317,029 loss, it is conceivable that the IRS simply agreed with that position. How are you to know if the IRS agreement was inadvertent? More facts would certainly be needed surrounding the transaction at issue to determine if it were a conceptual or clerical error.

A core question Householder raises is whether by filing a petition and invoking the power of a tribunal (and thus MRPC Rule 3.3), you are under any sort of obligation to correct errors on a Notice of Deficiency: computational, clerical, or otherwise.  A secondary question is whether silence on such a mistake is the same as prohibited “misrepresentation” to the court. I don’t think it is always so simple as to say “it’s not my job to fix the IRS’s mistakes.”    

In any event, by the time Householder gets to the Tax Court, Judge Holmes is essentially handcuffed in getting to the right number. Particularly where settlement is done on issues rather than bottom line numbers, it appears that silence on an error concerning how those issues will ultimately “add up” under Rule 155 computations is not going to be upset by the court. See Stamm Int’l Corp. v. C.I.R., 90 T.C. 315 (1988).

But that’s not what this foray into ethics is all about. This is not about what the Tax Court can do, but what a tax attorney should do under their professional obligations. I certainly do not have enough facts to know whether Householder involved conceptual, computational, or clerical mistakes. I do know that these sorts of gifts raise all sorts of ethical issues and are not as fun to receive as one may think.

Accepting Gifts from the IRS: Ethical Considerations (Part One)

Previously, I wrote about the strange case of Householder v. C.I.R (here). As a refresher, the Householders tried to take about half-a-million dollars in nonsense deductions for their horse breeding/leasing “business,” and the Tax Court disallowed them. This, of course, resulted in a $0 deficiency after running Rule 155 computations.

Wait, what?

Yes, that’s right: there was no deficiency for the Householders even after “losing” on a half-million dollar deduction because the IRS made a serious mistake in their Notice of Deficiency. Essentially, the IRS “gifted” the Householders a tax loss unrelated to the one at issue before the court. In the previous post we mostly looked at whether the IRS could take back or otherwise undo their gift. This time, we’ll look at ethical considerations for counsel in accepting these gifts.

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It took all my willpower not to name this blog “Emily Post’s Guide to Accepting Gifts From the IRS.” However, the real concerns for counsel in these situations are less matters of etiquette and more the competing obligations of confidentiality with your client and candor to the court.

As a human in the world, I might think morality dictates I should tell the IRS of an erroneous “gift” so they can (presumably) rescind it. But as a lawyer in the world, professional rules dictate otherwise- something that may be thought of as a “loophole” in morality. (I can’t help myself: I was a philosophy major with a focus on applied ethics and I’m still paying off those loans. Any reference I can make to something I learned in undergrad eases the pain.)

Without being able to heavily rely on our gut moral compass, it can be difficult to know what is required of you as a lawyer on ethical issues. Lawyers have to think in terms of what “is or isn’t” in accordance with the Model Rules of Professional Conduct (MRPC). And even within the constrained universe of the MRPC it can be difficult to know what your ethical responsibilities are: as the Minnesota Rules of Professional Conduct state, these are “rules of reason.” See MRPC “Scope” [14]. In most situations attorneys must work backwards from the general principles of the MRPC to arrive at an answer.

Fortunately, there is an ABA Statement almost directly on point for the sorts of issues at play in Householder. This is ABA Statement 1999-1.The money quote from that statement is as follows:

“A client should not profit from a clear unilateral arithmetic or clerical error made by the Service and a lawyer may not knowingly assist the client in doing so. This is not the case, however, if the computational error is conceptual, such that a reasonable dispute still exists concerning the calculation.”

The ABA Statement creates a typology of “gifts,” each with different characteristics and ethical considerations. The differences are important primarily in how they determine what duties you owe the client, the IRS, and the court. Those different varieties are (a) computational gifts, (b) clerical gifts, and (c) conceptual gifts. Let’s take a look at each before figuring out which one the Householders received.

Clerical Gifts

Let’s begin with the easiest one to classify and respond to: clerical gifts. These can be thought of as typos, and they are not the sort of gifts you are allowed to accept. If my client and the IRS settle on a refund of $1,000 and the IRS types up a decision document accidentally listing a refund of $100,000 my role is clear: Let the IRS know of the mistake. I don’t even need to consult my client on that. The decision document would be entered in court and failing to correct this mistake would be in violation of my duty of candor to the court. MRPC 3.3.

You might be thinking to yourself, “but what about your duty to the client? Shouldn’t they get the final say as to whether to accept this payday since the mistake is a client confidence?”

Not so. Where the court is involved, such client confidences are explicitly overruled by MRPC 3.3(c). In fact, because you’d already reached a settlement amount with the client and IRS, you don’t even need to disclose the issue to your client: you have implied authority to make the fix on your own. See MRPC 1.6(b)(3). As we’ll see with the other varieties of gifts, this issue of maintaining a client confidence can be a serious sticking point.

If the matter didn’t involve entering a decision document in court (and therefore candor towards a tribunal), the answer may be different. In that case, you’d want to have a long chat with the client about the criminality of cashing a government check they aren’t entitled to. And as a tax lawyer you’d probably want to drop the case because of Circular 230 concerns. But that isn’t what we’re dealing with for the purposes of this blog. For now, playing the role of Emily Post, if the IRS gives you a clerical gift, one must politely say “I could never accept such generosity.”

Computational Gifts

Computational gifts may be “squishier” than clerical gifts and entail a broader range of mistakes. On one end of the spectrum the mistake may be simple arithmetic: 2 + 2 = 5. This isn’t a far-cry from a clerical mistake, and identical ethical considerations apply: you cannot accept such generosity, and you must disclose (if in court). Most of the time, however, the arithmetic isn’t so cut-and-dry. What if the issue isn’t failure to correctly add two numbers, but failure to consider a code section that would introduce another variable to the equation? In other words, what if the correct computation is 5 + 3 x 0 but the IRS doesn’t recognize a law providing the zero multiplier, and only adds 5 + 3? Computational, to be sure, but not strictly so…

Which leads us to the final category: “Conceptual Gifts.” These are the gifts attorneys want to receive from the IRS, because in some circumstances they can actually accept them. Was the Householder’s erroneous Notice of Deficiency one such conceptual gift? We’ll take a deeper look at what exactly distinguishes conceptual gifts from purely computational ones in the next post.

Incapacitation, Death and the End of an Era, Designated Orders November 16 – 21, 2020, Part II

The week of November 16, 2020 was the week preceding Thanksgiving and the Tax Court’s transition to Dawson was looming, which meant orders would no longer be “designated” on a daily basis. The judges knew it may be one of their last opportunities to alert the public (and Procedurally Taxing) to an order. Many lengthy, novel and diverse orders were designated. As a result, my week in November warranted two parts, and this second part is my last post on designated orders ever. I’ve learned a lot over the last three and a half years, and I hope you all have too.

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Answering Interrogatories while Incapacitated

In consolidated Docket No. 26812-12, 29644-12, 26052-13, 27243-15, 5314-16, 5315-16, 5136-16, 5318-16, Deerco, Inc., et al. v. CIR, the case involves the acquisition of a corporation and the subsequent removal of substantial plan assets (over $24 million) from the acquired corporation’s pension plan in 2008.

The petitioner who is the focus of this order was the President of the acquiring corporation and the trustee for the pension plan of the acquired corporation in control of the disposition of assets, so naturally, the IRS is very interested in what he has to say. Unfortunately, he is incapacitated. His counsel answered some of the IRS’s interrogatories on behalf of all the petitioners (individuals and entities) in this consolidated case by stating that they lack information or knowledge.

The IRS and Court find petitioners’ counsel’s answers to be insufficient for a couple reasons:

1) Rule 71(b) requires the answering party to make reasonable inquiry and ascertain readily available information. A party cannot simply state they lack the information without explaining the efforts they have made to obtain the information. Even though the petitioner is incapable of responding, the Court thinks he should have documents or records that would enable his counsel to answer the substance of the interrogatories. Petitioner also had an attorney and accountant assisting him during the transaction at issue, and those individuals may have useful information, documents, or records.

2) The Court also finds the answers are procedurally defective. The procedures, found in Rule 71(c), differ depending on whether an individual or an entity is providing the answer. In this case, petitioners’ counsel has signed under oath the answers on behalf of all petitioners. Counsel is permitted to answer and sign under oath for entities, but not for individuals. Individuals must sign and swear under oath themselves. The petitioner in this case can’t do that, but his wife has been appointed as his guardian, so she can.

There are other issues raised (such attorney-client privilege concerns), but the prevailing message is that the Court thinks petitioner’s counsel can do better and outlines the ways in which they can provide more adequate answers.

We Cannot See A Transferee

In consolidated Docket No. 19035-13, 19036-13, 19037-13, 19038-13, 19058-13, 19171-13, 19232-13, 19237-13,  Liao, Transferees, et al. v. CIR, the IRS tries several avenues to prove that petitioners, who consist of the estate and heirs of a taxpayer who owned a holding company, called Carnes Oil, should be liable as transferees when an acquisition company ultimately sold the company’s assets and tried to use a tax shelter to offset the capital gains.

In this case, initially, a company called MidCoast offered to buy Carnes Oil’s shares. MidCoast has a history of facilitating a tax shelter known as an “intermediary transaction.” In another post for PT (here), Marilyn Ames covers a Sixth Circuit decision in Hawk, which involved MidCoast, intermediary transactions, and some implications under section 6901. In Hawk, the Court affirmed the Tax Court’s decision and held that petitioners’ lack of intent or knowledge cannot shield them from transferee liability when the substance of the transaction supports such a finding.

In this case, petitioners have moved for summary judgment, and their lack of knowledge is one of the factors the Court uses to ultimately determine petitioners should not be held liable as transferees. Petitioners’ case is distinguishable from Hawk, because the Court determines, in substance, the transaction was a real sale.  

Petitioners didn’t accept MidCoast’s offer, but instead accepted an offer from another company called ASI. More details are fleshed out below, but long story short- the IRS argues an “intermediary transaction” occurred. In support of this the IRS insists that the economic substance doctrine (a question of law) and substance over form analysis (a question of fact) show that what looked like a sale of stock for money was really the sale of Carnes Oil’s assets followed by a liquidating distribution directly from the company to petitioners. The IRS seeks to reclassify the estate and heirs from sellers to transferees to hold them liable.

Even viewing the facts in a light most favorable to the IRS, the Court disagrees under both analyses. The heirs reside in different states, so the appellate jurisdiction varies. The Court acknowledges that they may have to contend with subtle conflicts among the jurisdictions, but regardless of the jurisdiction, whether a transaction has economic substance requires a close examination of the facts.

The facts show that when petitioners sold their stock the company still had non-cash assets, and those assets weren’t liquidated until after ASI controlled it. Petitioners also weren’t shareholders of the dissolved corporation, because it continued to exist for over a year after they sold it.

The facts are not clear as to where ASI got the money to pay petitioners, but after tracing the funds from relevant bank accounts, the Court determined it did not come from Carnes Oil, or a loan secured by their shares.

Neither the petitioners nor their advisers had actual knowledge of what ASI was planning to do. The IRS says there were red flags and petitioners should have known, but the Court finds Carnes Oil was a family company using local lawyers in a small town, and the shareholders reasonably accepted the highest bid.

It was a real sale. The company got an asset-rich corporation and petitioners got cash. The Court grants petitioners’ motion for summary judgment – a win for petitioners in an increasingly pro-IRS realm.

Gone and Abandoned

In Docket No. 23676-18, Miller v. CIR, the Court dismisses a deceased petitioner’s case for lack of prosecution despite his wife being appointed as his personal representative. Petitioner died less than a month after petitioning the Tax Court in 2018 and after some digging the IRS found information about petitioner’s wife.

The Court reached out to her and warned that if she failed to respond the case was at risk of being dismissed with a decision entered in respondent’s favor. The Court did not receive a response.

Rule 63(a) governs when a petitioner dies and allows the Court to order a substitution of the proper parties. Local law determines who can be a substitute. The Court’s jurisdiction continues when someone is deceased, but someone must be lawfully authorized to act on behalf of the estate. If no one steps up the prosecution of the case is deemed to be abandoned.

The Court finds petitioner is liable for the deficiency amount, but it’s not a total loss for the estate, because IRS can’t prove they complied with section 6751(b) so the proposed accuracy-related penalty is not sustained.

All’s Fair in Love and SNOD

In consolidated Docket No. 7671-17 and 10878-16, Roman et. al. v. CIR, a pro se married couple with separate, but consolidated Tax Court matters moves the Court to reconsider its decision to deny petitioners’ earlier motions to dismiss for lack of jurisdiction. The motions were disposed of by bench opinion.

The Court reviews the record and determines that petitioner made objections that have yet to be ruled on.

First, however, it explains that there are two procedural reasons for why petitioner motions could be denied. Petitioners filed the present motion under Rule 183, but that rule only applies to cases tried before a Special Trial Judge. Petitioners in this case have not yet had a trial, the bench opinion only exists to dispose of petitioners’ motions to dismiss, so Rule 183 is not applicable. Additionally, the motions for reconsideration were filed more than 30 days after the petitioners received the transcripts in their case, so they were not timely under rule 161.

Even though the motions could be denied for those reasons, the Court goes on to consider the merits of petitioners’ arguments.

Petitioners’ argue that the Court lacks jurisdiction because their notices of deficiency were invalid because they were not issued under Secretary’s authority as required by section 6212(a).   

Petitioner wife argues her notice of deficiency is invalid because it originated from an Automated Underreported (AUR) department and was issued by a computer system, which is not a under a permissible delegation of the Secretary’s authority.  

Petitioner husband’s notice of deficiency was issued by a Revenue Agent Reviewers about a year later. He argues that his notice is invalid because the person who signed the notice was not named on the notice and she did not have delegated authority to issue the notice. The IRS was not sure who issued the notice, but there were three possibilities. Petitioner husband says not knowing who specifically issued the notice constitutes fraud.

After reviewing the code, regulations, extensive case law, and the Internal Revenue Manual the Court concludes both notices were issued under permissible delegations of the Secretary’s authority and the case can proceed to trial.

Orders not discussed:

  • In Docket No. 25660-17, Belmont Interests, Inc. v. CIR, the Court needs more information from the IRS about how it plans to use the exhibits which petitioner wants deemed inadmissible. According to IRS, the exhibits support the duty of consistency related to representations made by petitioner. Petitioner states the exhibits include representations made in negotiations directed toward the resolution of prior cases involving the same or very similar issues and the F.R.E. 408(a) bars their admission.  
  • Docket No. 10204-19, Spagnoletti v. CIR (order here) petitioner moves to vacate or revise the decision in his CDP case based on arguments made in the original opinion which the Court found were not raised during in the CDP hearing nor supported by the record, so the Court denies the motion.
  • Docket No. 11183-19, Bright v. CIR and Docket No. 18783-19, Williams v. CIR, two bench opinions in which petitioners were denied work-related deductions primarily due to lack of proper proof.  

Contracts and the Court, Designated Orders November 16 – 21, 2020, Part I

Changes made during transition to the Tax Court’s new website prevent us from easily linking to the orders discussed in this post, but if you are interested in seeing an order you can search the case’s docket number on the Court’s website to find it.

Almost every area of law requires some knowledge of the tax code, especially contract law, and many of the orders designated during the week of November 16th demonstrate that. Summary judgment is not appropriate when a genuine dispute of a material fact exists, so can a genuine dispute exist when a case involves a legal writing, such as contract, deed, or agreement? The validity of the legal writing is not being questioned in any of these cases, but the Court reviews the legal writings to determine whether summary judgment is appropriate.

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Conservation Easement Deeds

The Court has been reviewing conservation easement deeds for perpetuity requirement violations for a while now and has been consistently granting summary judgment in favor of respondent. But the tides may be changing, in Docket No. 20849-17, St. Andrews Plantation, LLC v. CIR, the Court denies respondent’s summary judgment motion on this issue.

As we’ve seen and blogged about before, the deed in this case contains the “forbidden language” which fails to guarantee the donee its proportionate share of proceeds if the conservation easement is extinguished. This violates the perpetuity requirement and causes the donor organization to lose its charitable contribution deduction. For background information the posts here and here are most helpful.

So why isn’t this case another slam-dunk for respondent? According to the Court, “the deed in this case is different than the deeds in other cases,” because the “deeds in other cases contemplated future improvements that had obvious value.”

The language in the deed at issue in this case only permits maintenance of existing modest improvements, which consist entirely of a forest paths, gravel and other permeable-base roads, drainage ditches, and a metal entrance gate.

Unlike the more elaborate improvement possibilities in other cases (such as, natural gas wells, cell phone towers and additional structures) the options available in the deed in this case could not increase the fair market value of the subject property, or any increase would be de minimis. As a result, the improvements clause would not necessarily cause the donee organization to receive less than its proportionate share of proceeds in the event the property was sold following judicial extinguishment of the easement.

In Docket No. 14179-17, 901 South Broadway Limited Partnership, Standard Development, LLC v. CIR. The Court reviews the language of a deed for a façade easement and denies the IRS’s summary judgment motion while taking petitioner’s motion under consideration.

A façade easement it involves a different analysis for when it has a conservation purpose which is found in section 170(h)(4)(B) and requires that the building be listed in the National Register or be certified as having historic significance. Further section 170(h)(4)(C)(ii) requires non-National Register buildings to meet two additional requirements regarding preservation of the building’s exterior and “prohibits any change in the exterior of the building which is inconsistent with [its] historical character…”

Respondent argues that language in the deed related to the second additional requirement violates the perpetuity requirement. The deed requires the grantor to obtain prior express written approval from the grantee before it can make any changes to the building’s exterior, however, if the grantee fails respond to the request within 30 days the request is deemed approved (the “deemed approval provision”). Respondent argues that this means the grantor can make changes inconsistent with the building’s historical character if the grantee fails to respond.

But in a later section of the deed, the grantor is specifically prohibited from making any changes inconsistent the building’s historical character (the “prohibition provision”).

Both petitioner and respondent make arguments based on the deed’s construction, conflicting clauses, and the effect under California law, but the Court steps in to say none of that is necessary. The Court does not see any conflict between the deemed approval provision and the prohibition provision, because the prohibition provision limits both parties from permitting or making changes that are inconsistent with the building’s historical character so the grantee cannot be deemed to approve any request which it lacks the authority to approve.

Another order was designated in this case asking questions of respondent and setting a pre-trial conference for January 6, 2021. During the conference, IRS conveyed that they have abandoned the argument that the deed violates the perpetuity requirement argument, but they identified new issues under section 170(f) which the parties are working to resolve. 

Divorce and Separation Agreements

In Docket No. 13901-17, Redleaf v. CIR, the Court had to review the language in a divorce agreement to determine whether allocations made to petitioner were alimony or property settlements. Although the Court outlined the steps it must take when reviewing divorce agreements for characterization questions, the language in the agreement itself (referring to the allocations as “property settlement,” “division of assets,” “property division,” etc.) influenced the Court’s decision to grant summary judgment to petitioner.

In Docket No. 20452-18S, Valente v. CIR, the Court to review the terms of a separation agreement to determine whether payments made to petitioner were alimony or child support. In this case, an enrolled agent either didn’t understand, or didn’t follow, the separation agreement’s terms when he prepared petitioner’s tax return and treated a portion of what should have been alimony as child support because it produced a better result for her children’s college financial aid application. The Court determined there was nothing in the language of the separation agreement that would have allowed the alimony payments to be treated as child support payments and decided for respondent.

Contracts related to Research and Experimentation Credits

In Docket No. 7805-16, Meyer, Borgman & Johnson, Inc. v. CIR, the Court looks petitioner’s contracts to determine whether research was “funded” as defined in section 41(d)(4)(H). If the research was funded by petitioner’s clients, then petitioner is ineligible for the research credit.

The regulations instruct that “all agreements (not only research contracts) entered into between the taxpayers performing the research and other persons shall be considered in determine the extent to which research is funded,” and “amounts payable under any agreement that are contingent on the success of the research and thus considered to be paid for the product or result of the research are not treated as funding.”

The Court entertains many of petitioner’s arguments, but ultimately looks to the contracts and finds that none of them expressly make payments contingent on the success of petitioner’s research. Use of express terms have been identified as important in the case law that exists in this area. As a result, it finds there are no genuine issues of material fact and grants summary judgment to respondent.

The designated order in Consolidated Docket No. 27268-13, 27390-13, 27371-13, 27373-13, 27374-13, 27375-13, Tangle, et. al. v. CIR, also involved the research credit, but for the question of whether the qualified research tests were met and Section 41 exclusions avoided. Since it didn’t involve a contract, I don’t discuss it in detail.

Other Orders Not Discussed

There were three orders designated during the week of October 19-23, 2020:

Docket No. 2018-17L, Means v. CIR, petitioner’s case for very old tax years was dismissed after a lengthy history of non-compliance with Court orders.

Docket No. 25934-17, Tobin v. CIR, the Court grants IRS’s protective order requesting that they not be required to respond to petitioner’s request for admissions which perpetuate frivolous arguments.  

Docket No. 19697, Kalivas v. CIR, the Court denies petitioner’s motion for leave to file an amendment to petition because he failed to comply with the Court’s order, rules and more.

Making All Your Arguments in Collection Due Process Cases. Designated Orders, August 10 – 14, 2020 (Part Three)

The first two installments of this trilogy covered arguments that you are likely to raise in the hearing itself (the underlying liability), then moved to issues you might not be aware of until after the notice of determination is issued (procedural defects in assessment, or at least defects in the Appeals Officer verifying that the “applicable law or administrative procedures have been met.” IRC § 6330(c)(1). We end with an issue that is really only relevant after the hearing and in litigation: the record the Court will be able to review.

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Issue Three: The Administrative Record is Incomplete (Mitich v. C.I.R., Dkt. # 4489-19W (here))

Full disclosure: this order is not a CDP case (it’s a whistleblower case). But the admin record is critical for CDP cases. (And whistleblower cases. And innocent spouse cases.) So questions on the completeness of the administrative record are worth focusing on.

In cases where the reviewing court is confined to the administrative record, the agency is the party that submits that record. But that doesn’t mean the agency gets to dictate everything that is or should be in it. Still, the agency does have a fair amount of control over that record. And perhaps (though perhaps not -more on that later) the agency has even more control over what constitutes the administrative record in the first place when they promulgate regulations specifically defining the contents of administrative record.

It just so happens that whistleblower cases (like CDP cases) have a regulation on point for what comprises the administrative record. For whistleblower cases, the regulation is at Treas. Reg. § 301.7623-3(e) which provides in relevant part that the administrative record is comprised of “all information contained in the administrative claim file that is relevant to the award determination and not protected by one or more common law or statutory privileges.” In turn, the “administrative claim file” includes pretty much everything the Whistleblower Office reviews, as well as a final, catch-all category of all “other information considered by the official making the award determination.”

In the Mitich order, the whistleblower-petitioner thinks the tax return of the person they “blew the whistle” on should be in the administrative record. The IRS thinks that the return is not part of the administrative record, because the return was “not considered” in denying the whistleblower’s request. That may appear to be something of a head-scratcher, because in this instance the IRS clearly looked at the return (and the whistleblower’s information pertaining to it) before deciding not to pursue the tip. Indeed, the initial notes recommending denying pursuing the tip state “Rejecting claim as speculative after reviewing the taxpayers returns.” [emphasis added.]

There is nuance to the IRS’s position, however. The IRS argues that the official making the award determination didn’t rely on the return but rather relied on the initial employee (the “classifier”). Yes, the classifier relied on the return, but the classifier isn’t the official that made the determination, and in this case isn’t even a member of the IRS Whistleblower Office.

Judge Halpern isn’t entirely sold on that rationale, which leads to this order: that the parties provide a legal memo on why the return is or is not a part of the administrative record. This isn’t the first time the Tax Court has grappled with these sorts of issues. I was reminded of a previous order I covered in Whistleblower 6388-17W v. C.I.R. There, Judge Guy assigned extra homework to the parties (again, legal memos) on the tensions between IRC § 6103 and the parties’ (specifically, the whistleblowers) need to see the administrative file. Obviously, the IRS does not want to disclose any protected, confidential information, which may also provide some reason for them pushing so hard on why the tax return is not part of the administrative record here.

In any event, I somewhat doubt that whether the return is part of the record will have any bearing on Ms. Mitich getting any money. If the IRS never acted on her tip, and no proceeds were ever recovered, I am at a loss for how the tax returns help her. Yet looking at the order more broadly one can draw some other important lessons relevant beyond just the whistleblower context.

And this is where I return to the question, teased earlier: how much (legal) control does an agency have to restrict the administrative record? Because judicial review of whistleblower cases is limited by the “record rule,” exactly what the administrative record is and contains carries great importance. Two issues come to mind on that.

First, there is the issue of what should be in the record when both parties agree on the types of information that comprise the record rule but disagree on the contents. When problems arise under this category, the dispute is usually about the “completeness” of the record, and not the sorts of things that properly should be in it. For example, if both parties agree that all communications between the taxpayer and Appeals should be part of the record but a fax that the taxpayer sent to Appeals is not included, that would be an argument about completeness. This can be more fraught than it would otherwise appear.

One reason for discord is that the agency is generally the custodian of the administrative record. Taxpayers should be vigilant and keep their own “mirror” file and be ready to challenge the IRS’s version. And the Tax Court will likely entertain these challenges: in whistleblower cases, the Tax Court has held that “the Commissioner cannot unilaterally decide what constitutes an administrative record.” (T.C. 145 No. 8 (2015)) Problem (basically) solved.

But there is a second issue that I think is worth exploring: when the parties dispute the scope of the administrative record. Specifically, my concern is whether an agency can shield information from court review through promulgation of regulations narrowly defining the administrative record. Because I am more familiar with CDP than whistleblower cases, I will use CDP as the example.

The applicable regulation (Treas. Reg. § 301.6330-1(f)(2)(A-F4)), defines the administrative record in CDP cases pretty broadly, so arguments about its scope would likely be rare. Further, even where the “record rule” is in effect, it doesn’t render the administrative record unassailable: a petitioner can supplement the record where something needs to be explained. This, I believe, is most common with “call notes” from Appeals. Whatever notes Appeals takes during a call are part of the administrative record. Notes from the petitioner… not so much (at least not under the regulation). As a matter of course, my tax clinic always sends a fax to Appeals memorializing the conversation after a call so that it becomes “written communication […] submitted in connection with the CDP hearing.”

To be sure, I don’t have serious problems with the definition of the administrative record as provided by the regulation. But it isn’t impossible for me to imagine things I’d like to have as part of the administrative record which, by a strict reading of the regulation, might not be. One that comes to mind are communications made with Appeals after the Notice of Determination. On this point you may say, “well those conversations are plainly irrelevant since the Court is only looking at the Notice of Determination. Also, didn’t you write something about the Chenery doctrine before?”

I have. Also, it is entirely plausible to read the regulation such that those conversations would be part of the administrative file. My cause for concern is that when you’re dealing with a genuine abuse of discretion from IRS Appeals, you are often dealing with a constellation of questionable behaviors that does not end with the Notice of Determination. When IRS Appeals is being unreasonable I want every incidence of their unreasonable behavior to be in the administrative record. “Abuse of discretion” is a mushy and extremely difficult standard for the Tax Court (or practitioners) to work with. I would argue that demonstrating a pattern of IRS Appeals behavior, even if some if it occurs after the Notice of Determination is written, is relevant to that determination. I also think that regulations limiting court review, absent pretty explicit Congressional language supporting it, raises separation of powers concerns and arguably could be subject to being stricken down (see Carl Smith’s post on a related matter, here.)

Perhaps I am making a big deal of nothing in the CDP context, given the expansive language of the regulation. But what about in Innocent Spouse cases?

Recall that the Taxpayer First Act changed the scope of review in Innocent Spouse cases to “the administrative record established at the time of the [IRS] determination.” (IRC § 6015(e)(7)(A)) What does that administrative record entail?

Bad news for those who look to the regulations: they haven’t been updated since 2002. At numerous points, the regulations do not apply present law and are essentially obsolete. The regulation specifically dealing with Tax Court review (Treas. Reg. § 1.6015-7) provides one such example, taking the position that collection activity need not be suspended while requests are pending for equitable relief under IRC § 6015(f). This is not the case under the law as it currently stands (see IRC § 6015(e)(1)(B)(i)).

But apart from getting the law wrong, the regulation is also completely silent on the issue of what comprises the administrative record. Perhaps after the IRS crawls out from the heap of CARES Act and other guidance projects it has been tasked with, updates to that regulation may also be in order (it isn’t presently on the IRS priority guidance plan). But what is the Tax Court to do until then? What should be in the administrative record?

The Supreme Court has provided a little guidance on that topic. Judge Halpern cites to Citizens to Protect Overton Park v. Volpe, 401 U.S. 402, 420 (1971) for the proposition that “the record amassed by the agency consists of ‘the full administrative record’ before the agency.” Judge Halpern emphasizes the word “full” and notes that lower courts have interpreted that “fullness” to entail “all documents and materials that the agency directly or indirectly considered.” That seems pretty expansive. But I suppose we’ll have to wait and see… the issue is likely to come up sooner than later now that petitions being filed are subject to this record rule (see Christine’s post here).

Making All Your Arguments in Collection Due Process Cases. Designated Orders, August 10 – 14, 2020 (Part Two)

Welcome back to second of this three-part installment of “Making All Your Arguments in Collection Due Process Cases.” In Part One, we looked at a threshold question of when you are entitled to even raise certain arguments to begin with. The statute (IRC § 6330) precludes taxpayers from getting “two bites at the apple” in certain circumstances. These include arguing the underlying tax if you received a Notice of Deficiency or otherwise had an opportunity to argue the tax (IRC § 6330(c)(2)(B)). Note that while you do not have the right argue the underlying liability in those circumstances, you still can raise the issue and hope that the IRS Appeals officer decides to address it. See Treas. Reg. § 301.6330-1(e)(3)(A-E11). But it is in the “sole-discretion” of IRS Appeals whether to consider the issue in that case, and the decision (so the Treasury says) is not reviewable by the Tax Court.

Today, instead of relying on the goodness of the IRS Appeals Officer’s heart, we’ll dive into issues that the taxpayer almost always has the right to raise.

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Issue Two: The IRS Screwed Up (Procedurally) In Assessing the Tax (Mirken v. C.I.R., Dkt. # 18972-17L (here))

In a Collection Due Process hearing, if you focus on issues in the tax process the Tax Court will usually hear them out (go figure). If it was even remotely catchy, I’d suggest the following mnemonic device: In CDP, Subtitle F Gets You A’s and Subtitle A Gets You F’s. Feel free to never, ever think of that phrase again.

The Mirken order highlights the importance of CDP as a way to check the processes in assessment and collection. It also is worth giving Judge Copeland kudos for ensuring that justice is done where the pro se taxpayers may not have used the precise tax jargon a practitioner would.

As noted before, if you don’t raise issues in your petition you run the risk of conceding them. Sometimes you have a way out by arguing that the issues were tried by consent under Rule 41(b), but you don’t want to have to rely on this. You also need to allege facts supporting your assignments of error if you are the party with the burden of proof on them. On the rare occasion that you (petitioner) don’t have the burden of proof, you only need to raise the issue.

In CDP, one area where the IRS has the burden of proof is in verifying that all applicable law or administrative procedures have been met (IRC § 6330(c)(1)). Note again that you still have to raise that issue in your petition in the first place. Here, the unrepresented taxpayers did not raise this issue in their petition, but arguably did in their objection to the IRS’s summary judgment motion. Judge Copeland finds this to be sufficient to amend the pleadings under Rule 41(a), and then takes a look at the IRS’s records on the issue.

As is so often the case, the IRS records do not inspire confidence. A testament (again) to putting IRS records at issue at.

There are three assessments leading to liabilities here: (1) taxes assessed on the original return, (2) assessable penalties relating to the original return, and (3) taxes assessed through the deficiency procedures -in this case through the IRS Automated Under Reporter (AUR) program. In the Notice of Determination, the IRS Settlement Officer stated that she had “verified through transcript analysis that the assessment was properly made per [section] 6201 for each tax[.]”

This is something of a twist on the usual boilerplate I receive in my Notice of Determinations, which are extraordinarily unhelpful and usually just say, “I have verified that all procedures were met.” But even this twist (referring to transcript analysis and an actual code section!) won’t save the IRS. Being slightly more specific isn’t enough for the Tax Court to simply “trust” the determination.

For one, Judge Copeland notes that the taxes assessed under the deficiency procedures would not be assessed under IRC § 6201, but rather the deficiency proceedings (see IRC § 6201(e)). The most important component of deficiency proceedings is the Notice of Deficiency (again, go figure). With regards to the Notice of Deficiency, validity depends on the taxpayer actually receiving the notice with time to petition the court or the notice being properly mailed to the taxpayer’s “last known address” even absent actual receipt. See IRC § 6212(b).

There does not appear to be a record of the IRS Settlement Officer looking up if or where the Notice of Deficiency was mailed. In fact, as Judge Copeland notes, it doesn’t appear that the Settlement Officer knows what the taxpayers “last known address” would even be in determining the validity of a Notice of Deficiency. Should we just trust that the IRS did it right?

No, we should not. Especially not on a summary judgment motion from the IRS. And especially not when, as in this case, the Settlement Officer already sent a letter to the petitioners at the wrong address for this hearing.

Accordingly, Judge Copeland has no problem finding there to be a “genuine issue of material fact” that precludes summary judgment. And that is surely the correct outcome.

But before ending the lessons of Mirken I want to bring practitioners back to a threshold problem, and something I began this post on: raising issues in your petition. Frequently, in my experience, at a CDP hearing you are really only discussing the appropriateness of collection alternatives. A best practice would be to raise the procedural issues of assessment in the hearing, but when that doesn’t happen is it still acceptable to assign error to it in a petition? Can you do that under Tax Court Rule 33 when you don’t actually have a concrete reason (just general history and skepticism) to question that the IRS properly followed procedures?

I have two thoughts on that. My first thought is to amend the petition after getting the admin file. Hopefully that will happen soon enough that you can amend as is a matter of right, but often I doubt that will be the case. Fortunately, even if it takes a while to receive the administrative file my bet is that the Tax Court would freely allow an amended pleading if you are only able to learn of the problem later (I also doubt most IRS attorneys would object in those circumstances).

My second thought is that your standard practice should always be to request the administrative file as it exists in advance of the hearing. It is always a good idea to have as full a picture as possible on what information the IRS is working off. But beyond that, because of the Taxpayer First Act, you have a statutory right to the admin file in conferences with Appeals (see IRC § 7803(e)(7)(A)).

The most recent letters from Appeals I have received setting CDP hearings have specifically referenced the right of the taxpayer to request the file. It is always wrong (and not even an “abuse of discretion”) for the IRS not to follow a statute, and failure to send information you are legally entitled to certainly could be part of a Tax Court CDP petition. This isn’t an attempt to “set a trap” for IRS Appeals, but information that would be critically important for us to raise all potential issues at the CDP hearing. I know that I’ve made such requests to IRS Appeals and am still waiting…

Making All Your Arguments in Collection Due Process Cases. Designated Orders, August 10 – 14, 2020 (Part One)

My tax clinic has had a run of Collection Due Process (CDP) hearings lately -four in two weeks- after months of basically no action. I’ve found that historically my workload increases significantly this time of year, where cases that were long dormant suddenly spring to life with tight deadlines just before the holiday season.

Most of these “hearings” end up being a 2-minute phone call confirming that the Appeals officer received our Offer in Compromise and will wait for the Offer unit to make their preliminary determination before checking in again. Because most of my Offer cases are clear winners, the next step is usually just insisting on a Determination Letter (I am wary of waiving my rights to Court review for reasons detailed here) from Appeals months later when the Offer is accepted.

But there are times when my Clinic and Appeals doesn’t see eye-to-eye in the hearing, and we file a tax court petition (in addition to our four hearings, we’ve also filed two petitions under CDP jurisdiction in the last month). I’ve found that drafting these petitions is a bit more difficult for my students than the traditional deficiency petitions are, mainly because the assignments of error are not as straightforward as when you are reading off a Notice of Deficiency. But if you don’t raise an issue, you potentially concede it (Tax Court Rule 331(b)(4)) so we want to cover all of our bases -especially when we think the conduct of Appeals was objectionable in myriad ways, and want to highlight all of the relevant facts showing that.

Often my students want to argue two things: (1) the IRS abused their discretion by [whatever specific thing they failed to consider] rejecting the Offer, and (2) Something else. But they’re not really sure what that something else is, so it often starts out as some version of “and Appeals was mean when they did it.” Three of the designated orders for the week of August 10, 2020 provide something of a checklist for what arguments you may want to raise in CDP litigation -a way to supplement or supplant the “something else” assignment of error. (The remaining fourth order of the week is not substantive but can be found here.)

Let’s take a look at the three, and the issues they raise, in something close to a chronological order of when the issue would come about.

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Issue One: The IRS Should Have Let Me Argue the Underlying Tax! (Iaco v. C.I.R., Dkt. # 19694-18L (here))

Metaphorical barrels of metaphorical ink have been spilled on this blog about when taxpayers are entitled to argue the underlying tax in a CDP hearing under IRC § 6330(c)(2)(B). The thorny issue centers on what comprises a “prior opportunity” to contest the tax. Some of the blog’s coverage can be found here, here, and here.

In my humble opinion, the Tax Court has taken an overly broad view of what comprises a “prior opportunity” precluding taxpayers from raising the underlying tax. Thus, a taxpayer that wants to raise that argument (like Iaco in the above order) already has an uphill battle. For Iaco it is perhaps less of a hill and more of a wall.

The taxes at issue are excise (a tax on wagers under IRC § 4401(a)(2), which I’ll confess I was wholly ignorant of prior to now) which are not subject to deficiency procedures. Where a Notice of Deficiency is not required, under Lewis v. C.I.R., 128 T.C. 48 (2007), the inquiry is usually “did you already take your shot with IRS Appeals before the CDP hearing?” Here, Mr. Iaco did indeed take that shot, and now wants to take it again with a new Appeals officer in the CDP hearing.

(For those interested, the Iaco order could also provide a good lesson on the importance of record keeping. It appears Mr. Iaco ran an illegal gambling operation, busted in part because of a one-day wiretap. The IRS used the information from that one-day tap and extrapolated additional wagers based on it. Mr. Iaco said, “no way is that accurate!” but refused to provide any actual records of what the right amount of wagers was. In other words, Mr. Iaco failed to keep records like he is required to (see Treas. Reg. § 1.6001-1). This puts the ball firmly in the IRS’s court. And while they can’t just pick a random number, there is case law that allows the IRS to multiply the amount of wagers documented for one day by the likely period of wagering.)  

If your argument boils down to “I want to argue the tax with Appeals again because I don’t like what Appeals decided the first time,” you aren’t going to get very far. But there is perhaps a sliver of a kernel of an argument that you can still make: instead of arguing with the outcome of the first Appeals hearing, you argue with the process.

Mr. Iaco wants to argue that he never really had a prior opportunity, because the first Appeals conference was not a “fair and impartial hearing.” IRS Appeals is supposed to be independent and there is at least some statutory authority geared at ensuring that impartiality (see IRC § 7803(e)). Might there be a baseline standard of conduct from Appeals for the hearing to qualify as an “opportunity?” If so, how do we determine that baseline?

Judge Halpern has some thoughts on that question and looks to Supreme Court precedent to guide his analysis -specifically, Mathews v. Eldridge, 424 U.S. 319 (1976).

Mathews is one of the handful of name cases I recall from law school and it is all about “procedural” due process. If I were to dredge up my old flash cards, my bet is they would have something to the effect of “Issue: how much process is due?” The other side of the flash card would (hopefully) lay out this abridged three factor test: (1) what’s the private interest being affected, (2) what’s the risk of the current procedures erroneously depriving that interest, and (3) weigh those considerations against the government’s interest/costs were the procedures changed. Swirl those factors around and you will get an idea for the amount of process (for example, providing an evidentiary hearing) that is due before the deprivation of the private interest (in Mathews, the denial of social security disability payments).

Constitutional procedural due process does not require that the IRS provide a “Collection Due Process” hearing before depriving an individual of their property (i.e. levying) to pay back tax. Indeed, the IRS did not provide CDP hearings prior to 1998 and their collection methods certainly weren’t unconstitutional up to that point. So what value does Mathews have here, when a facial attack on the constitutionality of the IRS’s collection procedures would be sure to fail?

Remember, Mr. Iaco’s issue is mostly with the first Appeals hearing he received, where he argued against the IRS calculation of wagers and didn’t feel as if he were being heard. There is a specific line in Mathews which Judge Halpern quotes: “The fundamental requirement of due process is the opportunity to be heard at a meaningful time and in a meaningful manner.” Mathews at 333 [internal quotes omitted]. This gets at the issue of looking beyond procedures broadly to how they are applied individual specifically. Yes, these procedures exist and meet the requirements of constitutional due process, but were they properly administered? Mr. Iaco says Appeals was just a rubber-stamp for the initial tax determination. The question is, did Mr. Iaco have a meaningful opportunity to explain himself and be heard by the Appeals Officer?

The Tax Court finds Mr. Iaco did, so he is out of luck. Other taxpayers, however, may have better facts, which is why I think this order is worth considering in the constitutional dimension that Judge Halpern raises. As I’ve noted before, I think the Tax Court has narrowed taxpayers’ opportunity to argue the underlying tax in a CDP hearing beyond what the statutory language requires or Congress intended. The current state of the law is such that if you had a hearing with Appeals arguing the tax (even through audit reconsideration), you have now blown your chance to raise it in a CDP hearing and get Tax Court review. I think this creates a massive trap for the unwary, and perversely incentivizes waiting until CDP to argue your tax rather than dealing with it at an earlier stage. My hope is that circuit courts will take up the issue and reverse the Tax Court interpretation of the statute.

For now, an opportunity with Appeals essentially always equals a “prior opportunity” to dispute the tax under IRC § 6330(c)(2). The only (possible) way around it that I can see is to argue that the first opportunity with Appeals wasn’t an opportunity at all, because it wasn’t meaningful. At the very least, Judge Halpern appears to contemplate that as a precondition under Mathews. I imagine you’ll need a lot of facts for that heavy lift, showing any number of IRS Appeals abuses, to make that showing.

Until that happens, we have to look for a new argument in our CDP petition…