The Benefits of Tax Court… Designated Orders April 22 – 26, 2019

There are numerous benefits of having your case before the Tax Court, rather than Federal District court. In case books, those benefits are usually distilled to (1) the fact that Tax Court is a pre-payment forum, and (2) the expertise of the Tax Court judges (as opposed to generalists in federal court) in dealing with tax law. At least three of the six designated orders issued during the final week of April 2019 exemplify the latter benefit. The remaining orders, however, demonstrate a third, equally important but often unspoken benefit of Tax Court as a venue for disputes: the patience and experience of Tax Court judges in working with pro se petitioners.

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The Patience (and Boundaries) of the Tax Court. Brown v. C.I.R., Dkt. # 20102-17 (order here)

In some ways, the deeper structural value of our judicial system is simply the feeling that you have a chance to be heard. It may be less about the dollars at issue than the sense that you are being treated unfairly by the IRS -likely on matters that you don’t fully understand. So it is in the above case, where Judge Gustafson goes to great lengths to allow the petitioners their chance to be heard -where others may say that they have already had more than their fair share of that chance.

In this case, the IRS had conceded back in February that there was no deficiency due from the taxpayers… and so moved for an entry of decision to that effect. However, the taxpayers didn’t take “no deficiency” as a (good enough) answer, thereafter (and apparently for the first time) raising the issue that they actually should be due a refund. To get to the bottom of the issue, the Court asked the petitioners for a “succinct statement of the decision that they believe the Court should enter[.]”

Suffice it to say, the taxpayers did not comply with that directive, and instead brought up a lot of extraneous issues and general legal gripes (for example, seeking to bring in the petitioner’s employer as a defendant). This led to an entry of decision confirming that the petitioners didn’t have a deficiency, but also weren’t getting anything else refunded to them.

Petitioners weren’t happy with this, and so filed a motion to vacate, this time sufficiently bringing up the overpayment issue -or at least sufficiently for Judge Gustafson to calendar the motion to be heard in Court. Because the overpayment issue wasn’t properly raised in pleadings, Judge Gustafson even gives a few extra tips to the petitioners on what they’d need to do should they prevail on their motion to vacate -namely, file a motion to amend their petition under Rule 41.

And for what has this intricate, time-consuming, and costly sequence of events revolved around? A potential refund that Judge Gustafson calculates as, at a maximum, $92. Since the dispute only concerns $232 of allegedly over-stated wages, this refund amount would result only if the taxpayers are in the highest marginal bracket (which is doubtful).

But that isn’t the point. The point is that the taxpayers feel wronged and want their day in court to be heard. Kudos to Judge Gustafson in taking that right seriously.

(UPDATE: Judge Gustafson ended up granting the motion to vacate (order here) and both parties eventually agreed to a small “overassessment to be abated” of $65 (see decision here). Still no refund, however, as apparently the petitioner had self-reported a fairly large liability to begin with… Hat-tip to Bob Kamman for following up on this case and sending it my direction.)

Of course, Judge Gustafson’s patience is not boundless, nor should it be. In two other designated orders that don’t warrant great detail (here and here) where the petitioner failed to show up for trial -that is, to exercise their rights- Judge Gustafson had no problem dismissing for lack of prosecution. 

Tax Court Expertise: Showing Your Work on Qualified Dividends. Bara v. C.I.R., Dkt. # 17107-17SL (order here)

Bara involves the somewhat rare Collection Due Process review where the underlying tax is (perhaps) properly at issue under IRC § 6330(c)(2)(B). Or at least the parties act as if the underlying liability is properly at issue – Chief Special Trial Judge Carluzzo hints that it is perhaps an unsettled question. Since the deficiency appears to have been determined by a Math Error notice, and not a Notice of Deficiency, the question would be resolved based on whether the taxpayer had a “prior opportunity to dispute the tax” –which can be a rather murky inquiry. See posts here, here, and here. But rather than upset the apple cart, Special Trial Judge Carluzzo simply says he will “follow the lead” of the parties and treat the liability as if it were properly at issue.

Both parties filed motions for summary judgement on the issue of whether petitioner had properly computed his tax on qualified dividends. Since the material facts were not at issue on that matter, it was ripe for Judge Carluzzo to render a decision… which he does in a tremendous example of statutory analysis.

One would think that calculating the tax on qualified dividends is fairly simple. Generally, we entrust it to our tax software and don’t give it a second thought. But were you to try to figure out solely by reading the statute at issue (IRC § 1(h)), you may be excused if you were left with a headache and confusion. Judge Carluzzo “shows his work” in how to compute the tax under the relevant statute with almost four pages of walkthrough on how the code section works. I won’t repeat it here, but I will commend others to take a look. It is a startling example of how something seemingly so simple (a preferential tax rate) can be so convoluted.

It isn’t clear how the taxpayer made the mistake of treating the qualified dividends as taxed at a zero rate -it appears that he did, in fact, report the dividends on his return, so it wasn’t simply an omission. And unless you are Judge Carluzzo, these calculations are best done by computers -ergo the “math error” treatment by the IRS under IRC § 6213. Kudos to Judge Carluzzo, in any case, for walking through why it should be calculated the way the IRS did, and showing the work we generally entrust software to do for us.

Expertise of the Tax Court, By Necessity. Whistleblower 6388-17W v. C.I.R. (order here)

On other areas of tax law the Tax Court necessarily has more expertise than federal district courts, because they have sole jurisdiction over the subject matter. This includes whistleblower and Collection Due Process cases (the latter could go to District Courts until 2006, but cannot any longer). Like Collection Due Process, the whistleblower statute is still being developed. One issue that has been recently determined is the scope of review of whistleblower actions which, in accordance with Kasper v. C.I.R., 150 T.C. 8 (2018) is limited to the administrative record.

As Judge Guy notes, there is a natural tension in whistleblower cases “between the general rule of protection prescribed in section 6103(a) [e.g. confidentiality of other people’s tax return information] and the parties’ obligations to exchange information in a good-faith effort to arrive at basis for settlement[.]” This tension manifests itself when, as here, the IRS heavily redacts the administrative record (which the whistleblower would rely on) on the grounds that the information is protected under IRC § 6103.

And so, to get clarity on these competing concerns (petitioner’s ability to properly prosecute a whistleblower case and respondent’s imperative to protect certain tax information), Judge Guy essentially orders a summer exam for the parties. Both are to write separate memoranda “providing a comprehensive discussion and analysis of the applicability or nonapplicability (as the case may be) of the provisions of section 6103, and particularly the exceptions prescribed in section 6103(h)(4)(A), (B), and (C), both in the broad context of this whistleblower action and with regard to the specific categories of redacted documents [at issue in the order.]” If that looks like a law-school exam prompt, it gets even better: the parties are expected to “address the plain language of the statute, legislative history, and significant legal precedent in support of their positions.” A happy summer to all…

Expertise on Assessment Issues in Collection Due Process. Jarvis v. C.I.R., Dkt. # 19387-18SL (order here)

I noted above that I find it somewhat rare for a petitioner to successfully or appropriately raise the underlying liability in a Collection Due Process hearing. The order in the Jarvis case is an example of the more common outcome: you had your chance to argue the liability before, and you don’t get a second bite at the apple. In Jarvis, however, it appears that petitioner actually wants a third bite. To wit, the taxpayer had already argued the liability in a previous Tax Court deficiency proceeding (which was dismissed for failure to prosecute when the taxpayer didn’t show up for trial), raised again on a motion to vacate, and raised still another time when the taxpayer appealed to the Second Circuit. The appeal to the Second Circuit, after failing to prosecute the case, begins to seem like a delay tactic on paying… which is not successful because, as Judge Armen points out, an appeal does not stay assessment and collection unless you post bond. See IRC § 7485(a). Since petitioner didn’t post bond (that is, put some skin in the game rather than indefinitely delay the IRS from collecting) AND petitioner has not raised any issues about collection alternatives, the proposed levy is appropriate.

No third bite of the apple for the taxpayer in this case. And no more patience from the Court needed.

Designated Orders: Whether to Set Items Aside and Denied Motions for Summary Judgment (4/15/19 to 4/19/19)

This week brought a series of five designated orders. The subjects include Collection Due Process, Notices of Federal Tax Lien, settlements agreements, innocent spouse analysis, and denied motions for summary judgment.

Setting Aside a Notice of Federal Tax Lien?
Docket No. 3402-18 L, Esteban Baeza v. C.I.R., Order & Decision available here.

This case concerns Collection Due Process (CDP) for a notice of federal tax lien for years 2012 to 2015.

Mr. Baeza’s issues for 2012 are quickly dealt with. For 2012, Mr. Baeza filed an amended tax return that took care of his liability and resulted in a tax refund. The lien has been released so the IRS moved that the case be dismissed for that year on grounds of mootness. Mr. Baeza did not object so the Court granted that motion.

For years 2013 to 2015, Mr. Baeza had liabilities for those years and eventually entered into an installment agreement concerning the three years. However, the IRS machinery was already working and days before he entered into the installment agreement, they sent him a Notice of Federal Tax Lien, showing liabilities totaling about $58,000 for the three years. It is presumed he did not have that notice before entering into the installment agreement.


Mr. Baeza’s representative sent a form 12153 to the IRS, requesting a Collection Due Process hearing. The form requested withdrawal of the lien because of the installment agreement. There was no dispute of the liability or proposal of collection alternative (beyond the installment agreement in place). The argument was that the lien was improper due to the pending installment agreement.

IRS Appeals determined that all required legal procedures were followed in filing the notice of federal tax lien. The notice of determination had an attachment explaining why withdrawal was not appropriate.

The IRS filed a motion for summary judgment but Mr. Baeza did not respond. Because it is reasonable the IRS filed a notice of lien in order to protect its ability to collect in the event Mr. Baeza fails to fulfill the terms of the installment agreement and Mr. Baeza also did not provide arguments against that filing, Judge Gustafson granted the motion for summary judgment concerning tax years 2013 to 2015.

Takeaway: The notice of federal tax lien filing is routine for the IRS in collection cases, even when a taxpayer sets up an installment agreement. As the standard of review in Tax Court for these CDP cases is abuse of discretion by the IRS, the petitioner will need to actually make an argument concerning an abusive IRS practice in order to overcome the IRS motion for summary judgment.

Setting Aside a Signed Settlement?
Docket No. 27486-16, Edward Roberson & Connie Roberson v. C.I.R., Order and Decision available here.

The IRS sent the Robersons a notice of deficiency for 2011 and 2012 and Mr. Roberson a notice of deficiency for 2013 and 2014. The Robersons timely petitioned the Tax Court for a redetermination of both notices of deficiency. The IRS eventually amended its answer to assert Schedule C gross receipts for 2014.

The case was calendared for trial and called on November 5, 2018. After the case was called but before trial, the parties submitted a signed stipulation of settlement. The parties agreed in the stipulation that Mr. Robersons’ 2014 Schedule C gross receipts were $108,717 and gross expenses were $30,616. Counsel for both parties signed the stipulation. The Court gave the parties until January 7, 2019, to submit a decision reflecting the stipulation.

In November 2018, the IRS mailed the Robersons a proposed decision reflecting the stipulation for all years at issue. The IRS returned to work on January 28, 2019, (following the government shutdown) and found the Robersons had not signed the decision. They informed the IRS they would not sign the proposed decision.

The IRS filed a motion, asking the Court to enter a decision pursuant to the stipulation of settlement. The Robersons responded to the motion with new calculations adjusting the 2014 Schedule C gross receipts from $108,717 to $68,019 and gross expenses from $30,616 to $55,268, with penalties and interest adjusted accordingly.

Judge Buch analyzed the situation, stating that the claim of an error in the stipulation does not relieve the Robersons from responsibility for signing the stipulation. The Court may modify or set aside a stipulation that is clearly contrary to the facts, but does not set aside a stipulation consistent with the record simply because one party claims the stipulation is erroneous. They may grant relief if a party asserts contractual defenses, but a unilateral mistake of fact in a binding, unambiguous stipulation is not a ground for relief.

In this case, the Robersons did not present contractual defenses. They raised the issue of the error only after entering into the stipulation. Their unilateral mistake (if there is one) is not grounds to set aside a contract. The Court is unlikely to grant relief from a stipulation entered into after considerable negotiation. The Robersons note that the stipulation was following a “take-it-or-leave-it” offer by the IRS. Judge Buch points out the Robersons and their counsel were on notice of the IRS amended answer so all parties signed the stipulation long after being aware of what was at issue and had ability to go to trial. The judge was reluctant to relieve the petitioners from a stipulation after already entering into the stipulation with full knowledge of the relevant facts, so granted the IRS motion for entry of decision.

Takeaway: This case details the difficulties to avoid signing a decision after signing a stipulation. The stipulation will generally bind the parties and the judge detailed the few exceptions. One should expect to sign the decision after signing a stipulation in a Tax Court case.

Innocent Spouse Analysis
Docket No. 5680-18S, Elaine S. Thomas, Petitioner, & Robert Roy Thomas, Intervenor, v. C.I.R., Order (bench decision) available here.

The petitioner and intervenor married in 1987 and divorced in 2016. The parties filed a joint tax return in 2012 and had a liability for that year of $5,551, which the parties stipulate was due to the intervenor.

The petitioner had filed for innocent spouse relief for that year, which was denied by the IRS, and filed a subsequent petition to Tax Court concerning that decision and the intervenor filed to be a party to the Tax Court case.
Judge Carluzzo agrees with much of the analysis and conclusions in the IRS pretrial memorandum and comments on the areas of disagreement. First, the judge finds that petitioner did not know, or have reason to know, that the intervenor would not pay the unpaid liability shown on the return. The judge considers the factor neutral, rather than weighing against relief, as the IRS categorized it.

In the marital separation agreement, both former spouses agreed to split the IRS liability. The judge weighs this factor against granting relief, though the IRS categorized it as neutral.

The judge notes that he arrived at the same score of factors as the IRS – one in favor, one (possibly two) against relief, and the rest neutral – but the analysis is not simply mathematical.

The judge details what influenced him concerning the case. He is particularly influenced by petitioner’s agreement to pay half the 2012 liability. Next, by the decision of the spouses to pay other expenses than the 2012 income tax liability as they had the resources to pay the liability but chose to save or allocate funds for other purposes. Finally, that the liability is mostly, or entirely, due to intervenor.

Giving effect to the marital settlement agreement, the judge sees no reason why it is inequitable to hold the parties liable for their shares of the debt. The decision is then to provide innocent spouse relief to petitioner regarding the excess of one-half of the unpaid 2012 federal income tax liability reported on the 2012 tax return. Essentially, each of the former spouses is liable for one-half of the tax debt, reflecting their marital settlement agreement.

Takeaway: As noted, innocent spouse relief is not a mathematical decision concerning what is in one column or another. The judge will consider the facts and circumstances to determine what will weigh heaviest concerning relief.

Denied IRS Motions for Summary Judgment
1. Docket No. 19146-18 L, Jason E. Shepherd v. C.I.R., Order available here.
In this Collection Due Process case before Tax Court, Petitioner filed for review of a Notice of Federal Tax Lien concerning unpaid employment taxes and trust fund penalties concerning unpaid employment taxes quarterly periods from 9/2010 through 12/2011. The IRS filed a motion for summary judgment and Petitioner opposed the motion by asserting challenges to material facts.

Of note for trust fund penalties is that a Letter 1153 must either be personally served on the responsible person or sent by certified mail to the responsible person’s last known address. In the record on the IRS’s motion there is no copy of a Letter 1153 or any proof that it was either personally served on the petitioner or sent by certified mail to his last known address. Since the record did not prove that the Appeals Officer verified all applicable laws or administrative procedures were met concerning the assessment of the section 6672 penalties, Judge Leyden denied the IRS motion for summary judgment without prejudice.

2. Docket No. 1781-14, John Edward Barrington & Deanna Barrie Barrington v. C.I.R., Order available here.

The petitioners have previously been convicted for tax evasion based on guilty pleas – John Barrington for tax year 2005 and Deanna Barrington for tax years 2003 through 2005. The Court granted in part and denied in part an IRS Motion for Partial Summary Judgment through its order dated June 19, 2015. The order held the IRS was entitled to summary judgment so far as the petitioners fraudulently failed to file tax returns. The order denied the request to the extent the IRS sought to collaterally estop the petitioners from contesting they failed to report certain amounts of income for the years at issue and further collaterally estop John Barrington from contesting he fraudulently failed to file tax returns for tax years 2003 and 2004.

The IRS filed a new Motion for Summary Judgment on February 22, 2019. This motion included several of the same arguments and factual assertions as before, but now includes the argument that John Barrington made “judicial admissions” at a hearing held December 17, 2018 (with those admissions eliminating the need for trial). IRS Counsel cites his statements of “…I’m not arguing the fraud amount” and “…cannot argue the fraud on it, which we’re not.”

Judge Panuthos reviewed the 28 page transcript and did not come to the conclusion that John Barrington made a clear, deliberate and unequivocal factual assertion relating to the issue of fraudulent failing to file federal income tax returns for tax years 2003 and 2004. Since there is a dispute as to material fact, the Court denied the IRS’s motion.

Takeaway: These look to be times the IRS either tried to rush procedure or believed there was no dispute as to material fact and lost regarding motions for summary judgment.

AJAC and the APA, Designated Orders 4/8/2019 – 4/12/19

Did the Appeals’ Judicial Approach and Culture (AJAC) Project turn conversations with Appeals into adjudications governed by the Administrative Procedure Act (APA) and subject to judicial review by the Tax Court? A petitioner in a designated order during the week of April 8, 2019 (Docket No. 18021-13, EZ Lube v. CIR (order here)) thinks so and Tax Court finds itself addressing its relationship with the APA yet again.


I spent time reviewing the history of the APA’s relationship with the IRS as well as the somewhat recent Tax Court cases that have addressed it (including Ax and Altera). The argument put forth by petitioner in this designated order appears to be novel – but ultimately the Tax Court’s response is similar to its holding in Ax, with perhaps even more insistence on the Tax Court’s jurisdictional limitations.  

Most recently, the Ninth Circuit withdrew its decision in the appeal of Altera, and we wait to see if it decides again to overturn the Tax Court’s decision which held that the IRS violated the APA when issuing regulations under section 482. For the most recent PT update on the case, see Stu Bassin’s post here.

The case in which this order was designated is also appealable to the Ninth Circuit. Is petitioner teeing up another APA argument before the Ninth Circuit depending on what happens in Altera? That’s a stretch – since petitioner is asking the Court to treat a phone call with Appeals as a adjudication – but it is possible that something more is going on than what is conveyed in the order.

First, let me provide some background: Petitioner is an LLC taxed as TEFRA partnership; it filed bankruptcy in 2008 but then reorganized. Part of the reorganization involved the conversion of debt that Goldman Sachs (or entities controlled by it) had in the old partnership into a controlling equity interest in the new partnership.  After the reorganization, the partnership filed tax returns taking the position that the partnership was terminated on the date of the reorganization because more than 50% of the partnership interests had been ousted through what was in substance a foreclosure of the old partners’ interests. Accordingly, the old partners treated the reorganization as a deemed sale of their property and reported $22 million in gain.

Then, in 2011, reorganized EZ Lube filed an Administrative Adjustment Request (AAR) taking a position contrary to the former partners’ previously filed returns. The position taken in the AAR was that the partnership was not technically terminated, and instead the exchange of debt for equity created $80 million in cancelled debt income.

The IRS agreed with the AAR and issued a final partnership administrative adjustment (FPAA) reflecting that the partners’ originally filed returns were wrong. But one of the former partners liked the old characterization so in response to the FPAA, he petitioned the Tax Court.

In due course the case was assigned to Appeals and this is where things start to get messy. The Appeals officer stated, over the phone, that she agreed with the former partner. In other words, that the FPAA should be conceded. The Appeals Officer’s manager concurred but explained that they would need to consult with Appeals National Office before the agreement could be conveyed in a TEFRA settlement.  Appeals National Office did not agree with the Appeals Officer’s position, so the case did not settle.

Petitioner argues that the phone conversation with the Appeals Officer was a determination and should end the case. The basis for petitioner’s argument is that the IRS’s Appeals Judicial Approach and Culture initiative transformed Appeals to a quasi-judicial part of the IRS which listens to each side and then issues a decision (like a court) instead of negotiating settlements to end litigation.

The IRS does not dispute that the phone call occurred, nor does it dispute the substance of what the Appeals Officer said, but it does dispute that the phone call was a determination. The IRS acknowledges that AJAC may have changed how Appeals processes cases, but maintains it did not set up a system of informal agency adjudication followed by judicial review as those terms are commonly used in administrative law.  

The Court tasks itself to answer the only question it sees fit for summary judgment, which is: what is the proper characterization of what the Appeals officer said?

The Court can decide, as it has in other cases, whether the parties actually reached a settlement by applying contract law and by making any subsidiary findings of fact. But petitioner argues that the call was not a settlement, it was a determination and the Court has jurisdiction to review such determinations.

This is where the Court insists on its jurisdictional limitations and goes on to review all the different code sections that grant it jurisdiction. It does not find anything in the Code that allows it to review determinations by Appeals in TEFRA, or deficiency, cases.

The petitioner agrees that nothing in the Code provides the Court with jurisdiction to review Appeals determinations in deficiency cases. Instead petitioner argues that the default rules of the APA give the Court jurisdiction, because the Appeals Officer was the presiding agency employee and she had the authority to make a recommended or initial decision as prescribed by 5 U.S.C. 554 and 557, and the Appeals Officer’s decision is subject to judicial review under 5 U.S.C. 702.

This is where the Tax Court revisits some of the arguments made in Ax – that the Internal Revenue Code assigns Tax Court jurisdiction. This arrangement is permissible under what the APA calls “special statutory review proceedings” under 5 U.S.C. 703. See Les’s post here and Stephanie Hoffer and Christopher J. Walker’s post here for more information.

If petitioner seeks review under default rules of the APA, the Court’s scope of review would be limited to the administrative record with an abuse of discretion standard. This creates two different standards for TEFRA cases, and the Court finds this impossible to reconcile.

The reality is that when a petitioner is unhappy with a decision made by Appeals in a docketed case, they can bring the case before the Court. It seems as though petitioner in this case is trying to treat a decision made by the Appeals Officer assigned to the case as something different than a decision made by Appeals National Office – but a decision has not been rendered until a decision document is issued and executed by both parties. The Court points out that phone calls can be a relevant fact in determining whether the parties have reached a settlement, but it doesn’t mean the Court has the jurisdiction to review phone calls. Petitioner says phone call itself is of jurisdictional importance, but if that’s the case, it is the District Court, not the Tax Court, that is the appropriate venue to review it.

Is this a situation where petitioner is unhappy because there was a glimmer of hope that the case would go his way which was ultimately destroyed by the National office? Or is something more going on here?  AJAC is called a project and caused changes to the IRM. It’s not a regulation or even guidance provided to taxpayers – rather it is a policy for IRS employees to follow and seems to be a permissible process and within the agency’s discretion to use. But it’s not even AJAC itself that petitioner seems to have a problem with, instead petitioner’s problem lies with the difference between the appeals officer’s position and the National Office’s position on the case.

The Court denies petitioner’s summary judgment motion and orders the parties to file a status report to identify any remaining issues and explain whether a trial will be necessary.

Other Orders Designated

There were no designated orders during the week of April 1, which is why there is no April post from Patrick. The Court seemingly got caught up during the following week and there were nine other orders designated during my week. In my opinion, they were less notable, but I’ve briefly summarized them here:

  • Docket No. 20237-16, Leon Max v. CIR (order here): the Court reviews the sufficiency of petitioner’s answers and objections on certain requests for admissions in a qualified research expenditure case.
  • Docket No. 24493-18, James H. Figueroa v. CIR (order here): the Court grants respondent’s motion to dismiss a pro se petitioner for failure to state a claim upon which relief can be granted.
  • Docket No. 5956-18, Rhonda Howard v. CIR (order here): the Court grants a motion to dismiss for failure to prosecute in a case with a nonresponsive petitioner.
  • Docket No. 12097-16, Trilogy, Inc & Subsidiaries v. CIR (order here): the Court grants petitioner’s motion in part to review the sufficiency of IRS’s responses to eight requests for admissions.
  • Docket No. 1092-18S, Pedro Manzueta v. CIR (order here): this is a bench opinion disallowing overstated schedule C deductions, dependency exemptions, the earned income credit, and the child tax credit.
  • Docket No. 13275-18S, Anthony S. Ventura & Suzanne M. Ventura v. CIR (order here): the Court grants a motion to dismiss for lack of jurisdiction due to a petition filed after 90 days.
  • Docket No. 14213-18L, Mohamed A. Hadid v. CIR (order here): a bench opinion finding no abuse of discretion and sustaining a levy in a case where the taxpayer proposed $30K/month installment agreement on condition that an NFTL not be filed, but the financial forms did not demonstrate that petitioner had the ability to pay that amount each month.
  • Docket No. 5323-18L, Percy Young v. CIR (order here): the Court grants respondent’s motion to dismiss in a CDP case where petitioner did not provide any information.
  • Docket No. 5323-18L, Ruben T. Varela v. CIR (order here): the Court denies petitioner’s motion for leave to file second amended petition.

Consistency and Other Hobgoblins of the Tax Code: Designated Orders March 25 – 29, 2019

Consistency, Congress, and the Taxpayer. Wheeler & Colerico v. C.I.R., Dkt. # 6104-17S (order here)

This case largely circles around the duty of individual consistency -specifically whether you can be “temporarily away from home” for one tax purpose (IRC 162(a)(2)) while simultaneously being there “on a permanent or indefinite […] as distinguished from temporary basis” for another tax purpose (IRC 217 as interpreted by Schweighardt v. C.I.R., 54 T.C. 1273 (1970)). In this case the taxpayer wants to have their cake and eat it too: yes, I was temporarily away from home, but also my temporary absence established a new permanent place of employment.


The taxpayer needs these two (almost) contradictory facts to be found because he received and treated as non-taxable roughly $70,000 worth of per diem payments for the tax years at issue -payments that could only be tax free if he was temporarily away from home under IRC 162. Meanwhile, he also deducted $22,782 in moving expenses -expenses which can only be deducted if he is moving to a new principal place of work (i.e. no longer away from his tax home) under IRC 217.

Unfortunately for whatever clever arguments the taxpayer came up with, the precedential Schweighardt decision means that the legal outcome is basically a foregone conclusion. That decision addressed the interplay of exactly these same code provisions, and their appearance of inconsistency. As Judge Gustafson writes,

It is this whipsaw that informed the Tax Court’s construction in Schweighardt of the term “new principal place of work” in section 217(a): “[A] place of work is not to be considered a taxpayer’s principal place of work under section 217 if a deduction is allowable for traveling expenses while away from home under section 162.

In other words, you can only have one or the other benefit.

Frankly, that one sentence of Schweigardt should be enough on its own to put this case away (there are other damning facts, including that the work contracts explicitly say they are “temporary” and list his tax home at all times as being in Massachusetts). But there is another inconsistency that I think bears mention, and it is one of Congress’s and not the taxpayer’s making.

Imagine that Mr. Wheeler did not get a per diem while “away from home,” but instead paid for these expenses himself. Recall that, since the 2017 tax reform, unreimbursed employee expenses are no longer allowable itemized deductions. See IRC 67(a), (b) and (g). Accordingly, Mr. Wheeler would not be able to deduct those expenses in 2018 and moving forward. But what if he continued to receive a per diem, rather than deducting expenses he paid? In that instance, he would still get the tax benefit of not treating the per diem (or reimbursement) as taxable income (actually, it is better treatment than miscellaneous itemized deductions under pre-2017 law since it isn’t limited by 2% AGI). Why is this? Because those employer payments are still (probably) excludible under IRC 132(d), which was not repealed. One may question whether this is true, since IRC 132(d) refers to payments where a deduction would be “allowable” under IRC 162 or 167, but from what I can tell it appears to be the IRS’s position that they are still not includible in income (see IRS letter here). Note also that in the context of dependents, where post-2017 law reduces the exemption amount to $0, the deduction is still considered “allowable.” See IRC 151(d)(5) and IRS Notice 2018-70.

All of this is to say, those receiving money from their employer for job expenses get much better tax treatment than those that don’t. The clients I have with substantial unreimbursed employee expenses generally aren’t in a position to negotiate for a per diem, and generally aren’t well paid to begin with. One may question the propriety of this “inconsistency,” since it is likely to end up padding the pockets of people in a better position to pay the tax in the first place (which is generally a consideration of an equitable tax code).

Consistency in Giving Notice to the IRS of a Change in Address. Arnold v. C.I.R., Dkt. # 25750-17S (order here)

I always try to impart upon my students how important proper mailing is, and how frequently it is put at issue in tax cases. Certain statutorily required letters are particularly important to the assessment and collection procedures (e.g. the Notice of Deficiency and Collection Due Process letter). You won’t frequently win on challenges to the validity of the letter based on its content (see Keith’s post here) but you may win based on where it was actually mailed to. Specifically, the letter may be invalid if it was not mailed to the “last known address.”

As Keith detailed in a previous post the Tax Court has recently added some clarity to the last known address issue, in Gregory v. Commissioner. The above order represents a taxpayer casualty from that recent court decision. Because Ms. Arnold filed her Tax Court petition late, the Court must dismiss for lack of jurisdiction because of one of two defects with her “ticket”: (1) the ticket expired (IRS win) or (2) the ticket was invalid (taxpayer wins). Ms. Arnold’s only hope for the latter outcome is if the IRS sent the Notice of Deficiency to the wrong address. The address the letter was actually sent to was her old home, listed on her most recent tax return. Ms. Arnold wanted to argue that the correct address was the one listed on a Form 2848. And for a while, the Tax Court was sympathetic to that argument (see Patrick Thomas’s post here, listing out some of the previous cases where the Court addressed the issue).

Since Gregory is precedential, however, the 2848 change-of-address argument is no longer available – at least in Tax Court. I am unaware of any Circuit courts having ruled on the issue since the Treasury promulgated the regulation, so there may still be the potential for win on appeal.

But what is perhaps more interesting than the foregone legal conclusion in this case comes about from some sleuthing of frequent guest poster Bob Kamman.

Despite finding for the IRS in this order (again, a largely foregone conclusion), Judge Buch begins the order by chastising IRS counsel for filing a previous motion to dismiss that was “riddled with errors,” and failing to correct “some of the very same errors we explicitly noted[.]” Somewhat strangely, the case is being handled by the IRS’s L.A. office despite the trial and hearings being set in Michigan. Even more odd, it appears that IRS Counsel in Detroit would already be familiar with Ms. Arnold: she appears to have filed a case in US Tax Court (with her husband) for tax year 2013 (docket here). Ms. Arnold (assuming it is the same petitioner) filed that petition on 8/12/2016 –before the Notice of Deficiencies were issued in this matter. Again, this is pure conjecture, but one wonders if the address used in Tax Court, and directly with an IRS attorney, would be “clear and concise notice” of a change in address. As Judge Holmes puts it in a previous 2848 case (quoting a Bankruptcy court decision), the IRS “should not ignore what it obviously knows.” Alternatively, one could look at is as another example of the difficulties of providing agency-wide “clear and concise notice” of address change with an entity as vast as the IRS, and why it makes administrative sense for the IRS to want to limit the methods of notice that are valid.

Orders of the Rich and Famous. Ashkouri & Draper v. C.I.R., Dkt. # 17514-15 (order here)

The last order won’t be discussed in detail, since it involves “Graev” issues that have been dealt with extensively elsewhere. However, perhaps more interesting than the legal issues are the petitioners themselves – one in particular who is at least famous enough to have his own Wikipedia page (another hat-tip on that point to Bob Kamman). There isn’t much more I have to say on this case except that in tying in the theme of “consistency” I will note that low-income taxpayers may appear to get the short-end of the stick.

Most of the taxpayers I work with are subject to either Automated Under Reporter (AUR) or Automated Correspondence Exams (ACE). “Live human” (or field/office) exams are generally reserved for wealthier taxpayers (and likely those with a Wikipedia page). The inconsistency is that, under the recent decision of Walquist v. C.I.R., IRC 6662(b)(2) penalties arising from AUR/ACE do not require supervisory approval, whereas those same penalties would if the exam was initiated by a human. See IRC 6751(b)(2)(B). The mind fairly boggles.

Designated Orders: Too Little, Too Late (3/18/19 to 3/22/19), Part Two

In Part One of this week’s designated orders, I discussed four orders where the petitioners either did too little or were too late. In the following case, the petitioners did way too much so the final designated order of the week merits an examination of its own.

Too Much
Docket No. 20102-17, Victor Maurice Brown & Kimberly Denise Brown v. C.I.R., available here.

There is a lot to unpack in this case where the petitioners, the Browns, have been overzealous in their litigation.


• Tax Years 2014 and 2015 Notices

The IRS issued a notice of deficiency to the Browns for tax year 2014. The Browns did not file a petition with the Tax Court within the following 90-day time period. The IRS next issued a notice of intent to levy to the Browns for the 2014 tax year. The Browns did not file an appeal with the IRS within the 30-day time period for a Collection Due Process (CDP) case. The IRS later issued to the Browns a notice of intent to seize property for tax year 2014. This is a notice that does not support jurisdiction for a CDP case in Tax Court. Finally, the IRS issued to the Browns a notice of deficiency for tax year 2015 of $3,728, resulting from alleged unreported income from the sales of securities.

• The Browns’ Petition

The Browns filed their petition by attaching the valid 2015 notice of deficiency, plus the invalid 2014 notice of intent to levy and notice of intent to seize property. The petition stated “Deficiency-2015; Determination-2014.”

But, wait, there’s more!

The Browns’ petition describes a dispute Ms. Brown had with her former employer and alleges errors the employer made in reporting Ms. Brown’s 2014 compensation. Within the petition, there is a prayer for relief, which asks for: punitive damages for emotional distress (likely from the employer, filing false documents with the IRS), punitive damages for emotional distress (again likely from the employer as ‘redress for undetectable torts’), compensatory damages from the employer, that the Court grant the Browns a withdrawal of the 2014 tax year lien, “an increase in the recovery limit due to the unauthorized collection activities in connection with the collection of Kimberly Brown’s federal tax by way of unauthorized W-4 Withholding changes,” filing fees for amended tax returns for tax year 2014 and tax year 2015, a jury trial, all other relief the court deems just and proper, and “temporary, preliminary and permanent injunctive relief prohibiting further malicious and deceitful conduct.” The Browns did not later file an amended petition, nor any motion for leave to amend their petition.

• Dismissal of 2014

The IRS filed a motion to dismiss tax year 2014 from the case and the Court issued an order February 28, 2018, holding that the Browns’ petition was not timely filed regarding the 2014 notice of deficiency and that no notice of determination conferring jurisdiction had been sent to petitioners for 2014. The IRS motion was granted regarding dismissal of tax year 2014. References to that year were deemed stricken from the record, with a reminder that tax year 2015 was still pending before the Court.

• The Browns’ Subpoena

The Court issued notice that the case would be tried in Atlanta, Georgia, at the calendar beginning April 29, 2019. The Browns used Tax Court Form 14 to fill out a subpoena duces tecum and sent that to IRS counsel. The subpoena asks for various documents related to tax years 2014 and 2015. The subpoena does not list the production date as the trial date of April 29, but rather lists March 15. The place of production is not the courtroom, but the office of IRS counsel. A letter attached by the Browns indicates they did not include the fees and mileage required by Tax Court Rule 148.

• The IRS Motion for Entry of Decision

The IRS filed a motion for entry of decision in favor of the Browns for tax year 2015. The decision would be that there is no deficiency in income tax from and no refund due to the Browns for the 2015 tax year. The motion stated that the IRS Appeals Office agreed to concede all issues asserted on the 2015 notice of deficiency. However, the Browns refused to accept the concession, and objected to the granting of the motion. The Court ordered that the Browns were to state their objections with a succinct statement of their preferred decision and a succinct description of the issues no later than March 15, 2019.

The Court received the Browns’ response on March 18, 2019. They argue that the IRS motion attempts to circumvent the proper judicial review of the matters at issue, calling them “new matters” with contentions (1) the issuance of the notice of deficiency was the IRS proceeding in bad faith against the petitioners, (2) “the Court’s review of the evidence relative to tax year 2014, will demonstrate a systemic year-over-year pattern of fraudulent misstatements and other inaccuracies,” (3) “pursuant to the Federal Rules of Civil Procedure Rule 19, by order of this Court, the Court shall order AT&T be made a party to this case as a defendant,” (4) the IRS failed to develop facts supporting its position before issuing the notice of deficiency, (5) the burden of proof is on the IRS, pursuant to IRC section 7491(a) and Tax Court Rule 142(a), (6) the notice of deficiency lacked a factual relationship to the petitioners’ liability, (7) the IRS committed “fraud on the Court” and took positions it knew to be false, (8) for various reasons the determinations in the notice of deficiency are incorrect, so the Browns do not owe the tax asserted, and (9) the IRS has “engaged in unauthorized collection activities.” The response did not assert any overpayment for 2015 or any claims for litigation or administrative costs under Tax Court Rule 230 or IRC section 7430.

• The Browns’ Motion to Show Cause

The Court received on March 14, 2019, a Motion to Show Cause Why Proposed Facts in Evidence Should Not Be Accepted as Established from the Browns, filed pursuant to Tax Court Rule 91(f). Their Proposed Stipulation of Facts which accompanied the motion included a preamble listing 13 “new matter” issues. The stipulation included 152 numbered paragraphs of factual assertions with subparagraphs. Some issues and many allegations in the proposed stipulation relate to tax year 2014.

• Judge Gustafson’s Responses

The judge reviewed the Tax Court’s jurisdiction for this case. The Court has jurisdiction over the notice of deficiency for tax year 2015. They do not have: jurisdiction over the disputes between Ms. Brown and her former employer (or the ability to award damages for the dispute); authority under the Federal Rules of Civil Procedure to order a third party to be joined as a defendant; jurisdiction under IRS liens, levies or other collection activity without a timely CDP request (or other required documents); jurisdiction to award fees for filing amended tax returns or any other fees other than those allowed under IRC section 7430. The Tax Court judge is the trier of fact and the Tax Court is not authorized to conduct jury trials. The Anti-Injunction Act generally prohibits injunctions against the IRS, and the Browns showed no applicable exception.

The Browns’ response to the motion for entry of decision and motion for order to show cause includes issues they call “new matter” – a term drawn from Tax Court Rule 142(a). That Rule, however, actually concerns the burden of proof on “any new matter” raised by the IRS Commissioner beyond what the IRS asserted in their notice of deficiency. The Browns did not allege that the Commissioner actually asserted new issues. (In fact, the Commissioner was proposing to concede the 2015 issues in full.) What the Browns call “new matter” is likely a rehashing or elaboration of previous allegations and not issues relating to the 2015 tax year.

The Court determined that the IRS concession for tax year 2015 means there is nothing further to be decided. The IRS motion to quash the subpoena will be granted because it is moot; additionally, it is improper due to overbreadth concerning tax year 2014, for failure to proffer the required witness and mileage fees, and for demanding production somewhere other than the courtroom at the trial session. The Browns’ motion for order to show cause is moot and it proposes a stipulation that is overbroad.

The Court denied the Browns’ motion for order to show cause and granted the IRS motion to quash the subpoena and motion for entry of decision. As a result, there is no deficiency of income tax due from and no refund due to the petitioners for tax year 2015.

Takeaway: Know your audience and pay attention when the Tax Court explains items like jurisdiction and tax procedure to you.

First, the Browns did not understand which IRS notices bring eligibility for filing a petition with the Tax Court. Second, the Browns did not realize when to drop the issues related to the 2014 tax year. Third, do not take items from Tax Court rules and use them without understanding their meaning or context. Fourth, they brought in several issues that did not relate to the case or that were outside the Tax Court’s jurisdiction. I realize the Browns were unrepresented so that excuses some of their ignorance, but they really needed someone to keep them on track. I have a feeling the positive results they gained for tax year 2015 came about despite their efforts.

Designated Orders: Too Little, Too Late (3/18/19 to 3/22/19), Part One

The five designated orders for this week presented a series of petitioner issues. Generally, they fall into categories where the petitioner either did too little, too much, or was too late. In an interesting twist, two of the cases deal with a petitioner’s filing a motion to vacate or revise a decision under Rule 162.


Too Little
Docket No. 4965-18S, Christopher J. Bard v. C.I.R., available here.

The petitioner, a Chicago police officer, was self-represented in the petition he filed with the Tax Court. The petitioner was not active in his case so the IRS filed a Motion to Dismiss for Failure to Properly Prosecute on February 12, 2019. The Court entered and served its Order of Dismissal and Decision on February 28. That order granted the IRS motion, dismissed the case, and entered a decision in favor of the IRS deficiency and penalty determinations in the notice of deficiency.

On March 19, 2019, petitioner filed a Motion To Vacate Or Revise Pursuant to Rule 162. He states he “was completely shocked when he recently discovered that his case had been dismissed” because, “based on a misunderstanding and miscommunication with his tax return preparer, an enrolled agent,” he “mistakenly believed that his only obligation with respect to this tax court case was to file the petition at the beginning of the case and to do nothing more.”

Oh, really?

The judge begins with the Notice Setting Case For Trial, which set the case for calendar call at 10:00 a.m. on Monday, February 25, 2019. Within the notice it states that “the parties are expected to be present and to be prepared to try the case” and “failure to appear may result in dismissal of the case and entry of decision against you.” Within the notice, it guides petitioners to the Tax Court website and Judge Armen describes some of the assistance available there for self-represented petitioners. At the end of the notice, it states again, that “failure to cooperate may also result in dismissal of the case and entry of decision against you” (emphasis in the original).

The Court sent another notice of trial on January 29, 2019 reminding the parties of the time, date, and place of the trial session. In that notice, there is another warning that failure to appear may lead to dismissal of the case. The remaining two paragraphs are directed to self-represented taxpayers to assist with navigating the trial process, including how to seek assistance from a tax clinic.

When the IRS filed its Motion To Dismiss For Failure To Properly Prosecute, they provided details regarding communications with the petitioner. The following are listed in the order: (a) A letter from IRS Appeals regarding substantiation of disallowed Schedule A deductions provoked an insufficient response by petitioner; (b) Petitioner did not respond to a second similar letter from IRS Appeals; (c) IRS counsel left a voicemail at petitioner’s telephone number of record on February 6, 2019, in order to ascertain petitioner’s views and warning him that failure to participate in the case may lead to its dismissal, to which petitioner did not reply; and (d) IRS counsel left the same message on February 8 with the same result. The Court refers to the language in the petitioner’s pending motion to describe his actions – that he ignored all correspondence from the Service relating to the case because he mistakenly believed that his only obligation in Tax Court was to file the petition and do nothing more.

The day after the IRS filed its motion to dismiss (February 13), the Court served an Order that calendared the motion for hearing and included another warning. The entire order is quoted and once again it states that failure to appear may result in dismissal and a decision entered again the petitioner.

When the case was called and recalled from the calendar for the Chicago trial session on February 25, 2019, the petitioner did not appear and no one appeared on his behalf at either time. By contrast, IRS counsel appeared, supported their motion, and stated in response to the Court’s inquiry that there had been no response from the petitioner since filing the motion to dismiss.

In Judge Armen’s conclusion, he summarizes the issues with the petitioner’s motion. The petitioner “received multiple warnings from the Court about the need to appear in court” and the consequences for failing to appear (emphasis in original). The petitioner was warned by the Court and the IRS regarding the consequences for failing to cooperate in preparation of the case for trial (also emphasized in the original). The notices were not in “legalese” or arcane language, but were clear, concise, written in plain English, and easily understood by a reasonable person so petitioner’s alleged belief his only obligation was to file the petition and do nothing more struck the Court as disingenuous. Also, a police officer would know what to do when a court says to a party in a judicial proceeding that the party is supposed to show up. The judge states that the petitioner did not show up and did not offer any reason to excuse his failure to do so, plus the motion fails to offer a convincing reason justifying his failure to appear. The petitioner’s motion was denied.

Takeaway: This is a thorough review of the Tax Court’s efforts to notify petitioners regarding the necessity to participate in the Tax Court process and the consequences of failure to do so. I would agree that a police officer, while not a legal expert, should know it is necessary to appear in court when the court says you need to be there.

Judge Armen did not address the elements of Rule 162 in his order because, frankly, the petitioner’s actions did not even rise to the level where that should be analyzed. Instead, he focused on how the petitioner was warned to be active in his Tax Court case and was not.

• Docket No. 12070-18 L, Janine P. Antoine v. C.I.R., available here. The petitioner did not do anything after filing Form 12153 for a Collection Due Process hearing such as accept the settlement officer’s offer of a telephone conference or submit supporting documents. Following the Notice of Determination, the petitioner filed a petition with Tax Court. The IRS filed a motion for summary judgment and the petitioner filed a one-paragraph notice of objection with a statement that “there is a dispute between the parties in regard to withholdings” without elaborating or submitting supporting documents. The Court granted the IRS motion.

• Docket No. 4472-18 L, Richard Conant Giller v. C.I.R., available here. Petitioner did not respond to the settlement officer’s document requests in the 5 letters sent to him based on his Collection Due Process hearing requests. The IRS Notice of Determination led to the petitioner filing with the Tax Court for tax years 2011, 2013 and 2015. At trial, petitioner conceded issues with respect to 2013 and 2015. Concerning 2011, petitioner asserted he filed a Form 1040 for 2011 and the substitute for return prepared by the IRS was invalid. The evidence presented by petitioner shows his Form 1040 was not processed by the IRS because it lacked his wife’s signature. Also, the TurboTax materials petitioner offered state in two different places that “you can still file electronically” so they also indicate he never completed the electronic filing of his tax return. Petitioner’s evidence and the IRS transcripts did not indicate the 2011 tax return had been filed by petitioner. Decision was entered for the IRS that there was no abuse of discretion and that they may proceed with the proposed collection action.

Too Late
Docket No. 30082-14SL, Victor M. Crown v. C.I.R., available here.

Following a trial in this case, the Tax Court issued a Summary Opinion, and on April 5, 2016, entered an Order of Dismissal and Decision. Petitioner filed a motion to vacate or revise the decision on March 18, 2019. Here, Judge Guy analyzes Rule 162 and how it applies to the petitioner’s case.

Pursuant to Tax Court Rule 162, a motion to vacate or revise a decision must be filed within 30 days after the decision is entered, unless the Court allows otherwise. The Court generally cannot consider a motion to vacate that is filed after a decision becomes final. IRC section 7481(a)(1) provides the rule that a decision of the Tax Court becomes final on expiration of the time to file a notice of appeal. Section 7483 provides a notice of appeal generally must be filed within 90 days after a decision is entered.

There are exceptions for narrowly circumscribed situations such as that the Court may vacate or revise a final decision if (1) the decision is shown to be void, or a legal nullity, for lack of jurisdiction over the subject matter or the party, (2) the decision was obtained through fraud on the Court, or (3) there is a need to correct a clerical error in the decision.

Since the petitioner did not establish any of those exceptions to the finality of the decision in the case, the Court lacked jurisdiction to vacate the Order of Dismissal and Decision entered April 5, 2016. The Court therefore denied the petitioner’s motion to vacate or revise the decision.

Takeaway: I could understand being late on filing the motion, especially for a petitioner that is ignorant of the Tax Court Rules. To wait nearly 3 years and file the motion is unreal. The Tax Court will not wait for the petitioner who needs years to respond.

IRS’s “Trust Me, it Wasn’t Yours” Defense Doesn’t Fly, Designated Orders 3/11 – 3/15/2019

There were only two orders designated during the week of March 11. The most interesting of the two contains the quote from where the title of this post originates and is potentially a step in the right direction for the whistleblower petitioner. The second order (here) was a bench opinion for an individual non-filer.

In Docket No. 101-18W, Richard G. Saffire, Jr. v. C.I.R. (order here), Judge Armen is not impressed with IRS’s dodgy behavior. The IRS objected to petitioner’s previously filed motion to compel the production of documents, so petitioner is back before the Court with a reply countering that objection. Based on the iteration of what parties have agreed upon and what the record has established, it seems as though the IRS dropped the ball while reviewing petitioner’s whistleblower claim.


Petitioner is a retired CPA from New York and his whistleblower claim involved an investment company (the target taxpayer), a related entity (the advisor) and allegations of an improperly claimed tax exempt status. The claim was received in January of 2012. After it was submitted, but before it was formally acknowledged, petitioner also met with IRS’s Criminal Investigation Division.

In June 2012, the IRS determined that the claim met the procedural requirements under section 7623(b) and the ball was then passed to the IRS’s compliance function to determine whether the IRS should proceed with an exam or investigation.

In August two attorneys from IRS’s counsel’s office in the Tax Exempt and Government Entities (TEGE) Division, as well as a revenue agent from the TEGE Division, held a lengthy conference call with petitioner at the IRS’s request. According to petitioner, none of the IRS employees acted as though they had heard about the target taxpayer, its advisor, or issues raised by the claim previously. After the call, the IRS requested additional information which petitioner provided at the beginning of September 2012.

A technical review of the claim was completed at the end of September 2012, and the ball was again passed, this time to an IRS operating division for field assignment.

This is where the ball was apparently dropped as far as the claim itself was concerned. For five years petitioner did not receive any concrete information about the claim other than the fact that it was still open, but during that time petitioner learned from public information sources that a large amount of money was collected from the target taxpayer and that the SEC collected more than $1 million from the advisor.

Then in September 2017 petitioner received a preliminary denial letter followed by a final determination denying the claim because the IRS stated the issues raised by petitioner were identified in an ongoing exam prior to receiving petitioner’s information, petitioner’s information did not substantially contribute to the actions taken and there were no changes in the IRS approach to the issue after reviewing petitioner’s information.

Petitioner petitioned the Court. Three months later the Court granted the parties’ joint motion for a protective order allowing respondent to disclose returns, return information and taxpayer return information (as defined in section 6103(b)(1), (2) and (3)) related to the claim.  

Then petitioner requested the administrative file and five categories of documents related to the case. The IRS provided the administrative file, but it was heavily redacted and a large portion of the unredacted parts consisted of copies of the petitioner’s submission. IRS Counsel also sent information on three of the five categories, but it said that two of the categories of documents (regarding the exam of the target taxpayer and its advisor and communications between the IRS and SEC) were outside the scope of the administrative file, irrelevant to the instant litigation and were protected third-party information under section 6103.

IRS acknowledges that section 6103(h)(4)(B) permits disclosure in a Federal judicial proceeding if the treatment of an item on a taxpayer’s return is directly related to the resolution of an issue in the proceeding.

This is where the IRS’s “trust me- it wasn’t yours” defense comes into play. The IRS says the information does not bear on the issue of whether petitioner is entitled to an award because respondent did not use any of petitioner’s information. In other words, the IRS refuses to show the petitioner what information it used to investigate and collect from the target taxpayer, because it wasn’t the petitioner’s information that was used. The IRS also argues that the petitioner’s request is overbroad and unduly burdensome.

The Court finds this explanation insufficient and grants petitioner’s motion to compel discovery (with some limitations) finding that most of the documents that petitioner requests are directly relevant to deciding whether petitioner is entitled to a whistleblower award, and therefore, discoverable. The Court suggests that the information petitioner requests should be disclosed pursuant to section 6103(h)(4)(B). The Court allows respondent to redact some information (mainly, identifying information about the alleged second referral source), but orders respondent to provide an individual and specific basis for each redaction.

It’s a little odd that IRS has been so reluctant to provide the petitioner with information, but it doesn’t necessarily suggest that the reason is because petitioner is in fact entitled to an award. Now that the Court has intervened, hopefully the information will provide petitioner with a satisfactory answer as to why the IRS denied his award. 

Qualified Offers for Wealthy Taxpayers, Looking Behind the Notice of Determination, and Unlawful Levies in CDP – Designated Orders: March 4 – 8, 2019

This week brings five designated orders (technically six, but Judge Gale’s two orders granting Respondent’s motion to dismiss for lack of prosecution in Maldonado are practically identical). I analyze three cases below. In the other case, Judge Guy granted Respondent’s motion to dismiss for lack of jurisdiction in a deficiency case.


Docket Nos. 10346-10, 28718-10, 5991-11, Metz v. C.I.R. (Order Here)

Judge Holmes returns, as last time, to a motion for administrative and litigation costs under section 7430. The underlying decision was released last year (T.C. Memo. 2015-54) and the parties agreed recently to the precise deficiencies, leaving only this issue outstanding.

Thankfully, none of the TEFRA difficulties that plagued us last time are present today. Judge Holmes also notes that no dispute exists regarding whether a “qualified offer” was made, or whether that amount exceeded the deficiencies actually determined for 2004 and 2005. He also notes that, while taxpayers must exhaust their administrative remedies to claim fees under 7430, Respondent never raised that argument except for 2008 and 2009.

Instead, the net worth requirement under IRC § 7430(c)(4)(A)(ii) bedevils the Court this time. It is ultimately fatal to a claim for fees on any of the tax years. The net worth requirement applies equally to ordinary claims for fees and also to claims premised upon a qualified offer.

 Section 7430 itself contains no explicit net worth requirement, but references the general federal fee shifting statute under 28 U.S.C. § 2412. That statute defines a “party” eligible for fee shifting as “an individual whose net worth did not exceed $2,000,000” or “any owner of an unincorporated business, or any partnership, corporation, association, unit of local government, or organization, the net worth of which did not exceed $7,000,000 at the time the civil action was filed.” 28 U.S.C. § 2412(d)(2)(B).

So, to win fees, Petitioners must be “an individual whose net worth did not exceed $2,000,000 at the time the civil action was filed” or meet the separate $7 million requirement for businesses, if it applies. Petitioners declared in their motion for costs that, at the time of filing the petition, their collective net worth was between $2 million and $4 million.

What limit applies to taxpayers filing a joint federal income tax return? Section 7430(c)(4)(D)(ii) states that “individuals filing a joint return shall be treated as separate individuals for purposes of [the net worth requirement].”  As it turns out, however, there’s much more to the story than meets the eye.

The first question, then, is what limits apply to Petitioners? Petitioners argued that Mrs. Metz was entitled to a $7 million limit, because she was an owner of an S corporation, not the general $2 million limit for individuals. Judge Holmes quickly dispatches this argument; it is the partnership, corporation, or other entity itself that must petition for costs under 7430 to be subject to the $7 million limit. While an “owner of an unincorporated business”, such as a sole proprietorship, could qualify as an individual, Mrs. Metz’s S corporation was incorporated.

But even accepting that the $2 million limit applies, do Petitioners really get a $4 million limit? A prior case, Hong v. C.I.R., holds that the net worth requirement isn’t violated if each spouse, individually, has a net worth below $2 million, but a joint net worth above $2 million. What if one spouse has $3 million and the other $500,000? Does one qualify, but not the other?

Turns out, this is a tricky issue. Hong was decided before Congress inserted section 743)(c)(4)(D)(ii) into the Code. And after Hong, Treasury issued a regulation attempting to overrule it. 26 C.F.R. § 7430(f)(1), T.D. 8542, 1994-29 I.R.B. 14. (“individuals filing a joint return shall be treated as 1 taxpayer.”) Unhelpfully, that regulation only concerned itself with administrative costs, rather than litigation costs. But in 1997, Congress passed the provision in 7430(c)(4)(D)(ii) that treats taxpayers separately. Treasury didn’t get around to conforming the regulation to the statute until 2016; Judge Holmes notes that Petitioners aren’t attempting to rely on this latter regulation, either.  Judge Holmes further questions whether Congress in 1997 attempted to adopt Hong, or simply decided to adopt an aggregate $4 million cap; the latter is supported by a direct quote in the legislative history, which the 2016 regulation adopted.

So, Judge Holmes ends up raising a litany of questions that, while interesting, are somewhat irrelevant to resolution of this case. He finds that the current regulation (applying a $4 million joint net worth limit) didn’t apply when these cases were filed. The old regulation doesn’t apply, because Congress overrode it in 1997 in some respect. And because Hong hasn’t been overruled andit finds a separate $2 million per person net worth requirement, Judge Holmes must defer to that decision. (Judge Holmes also notes that legislative history indicating a preference for a $4 million joint asset requirement cannot override Hong.) As such, he holds that Petitioners have a $2 million net worth requirement each.

Next, Judge Holmes must decide whether Petitioners’ assets exceed the $2 million limit, looking at each Petitioner individually. What counts in the “Net Worth” definition? Congress included more non-statutory language in the legislative history stating that “[i]n determining the value of assets, the cost of acquisition rather than fair market value should be used.” But that’s just non-binding legislative history right?

Both the Ninth Circuit and the Tax Court have issued precedential decisions applying a cost of acquisition value, consistent with the legislative history, rather than a fair market value. United States v. 88.88 Acres of Land, 907 F.2d 106, 107 (9th Cir. 1990); Swanson v. C.I.R., 106 T.C. 76, 96 (1996). So while the legislative history might not be binding, the Tax Court’s own precedent, and the Ninth Circuit’s precedent under the Golsen rule, surely is. 

I will spare readers the level of detail into which Judge Holmes delves to value the Metz’s assets. Suffice to say, Petitioners suffered heavy losses that substantially reduced the fair market value of their assets, to a level where both Petitioners would likely have satisfied the net worth requirement. Under a cost of acquisition valuation (which does allow for certain deductions from the cost alone, such as depreciation), however, both Petitioners have over $4 million in assets each.

Judge Holmes indicates a discomfort with this result as a policy matter, concluding:

There is also an old saw uncertainly attributed to Ambrose Bierce that defines stare decisis as “a legal doctrine according to which a mistake once committed must be repeated until the end of time.”

But because the Tax Court must defer to its precedent, Judge Holmes denies the motion for costs due to Petitioners’ failure to meet the net worth requirements.

As an aside, this case may also represent the first judicial shout-out to the Designated Orders crew. Judge Holmes, in defining the law applicable to Petitioners during the relevant time, notes:

We happily leave the herculean chore of cleaning this stall to any tax proceduralists whose interest in the field is strong enough to impel them to read our nonprecedential orders. But we need do only a quick hosedown.

I’m not sure how I feel about our blog series being compared to intense equine waste management. But as they say, all press is good press.

Docket No. 388-18L, Ansley v. C.I.R. (Order Here)

Judge Urda issued his first designated order in Ansley, and it contains quite the message to Respondent’s counsel.

Respondent filed a motion for summary judgment in this CDP case back in November. In the meantime, the parties held a conference call. Among other items, Petitioner alleged that Respondent levied his Social Security income while his Tax Court case was ongoing. Indeed, Petitioner provided a letter from Respondent’s counsel admitting that the Service had levied Petitioner’s Social Security from February 2018 until November 2018 (totaling nearly $2,200) to satisfy one of the years at issue in the Tax Court case. The letter also noted that the Service eventually issued Petitioner a refund last December.

This is a problem for Respondent, as section 6330(e)(1) prohibits levies after a CDP request is filed in response to a notice of intent to levy. The Service’s conduct here seems fairly egregious; the case was filed in July 2017 in the Tax Court. And because no motion to dismiss for lack of jurisdiction was filed, presumably the CDP request was timely submitted long before this point. The record is unclear on whether the underlying case was in Automated Collection Systems or with a Revenue Officer. So either the Service’s computers were not properly coded or the RO made an egregious error. 

On a closer look, however, we can understand how this could happen. Originally, Petitioner filed a letter on June 5, 2017 with the Tax Court, which the Court docketed at 12702-17L as an imperfect petition for tax years 2012, 2013, and 2014. But the Service hadn’t yet issued a Notice of Determination for those years. So, Respondent filed a motion to dismiss for lack of jurisdiction, which the Court granted on January 10, 2018.

However, in that same order, the Court noted that Petitioner had submitted another letter on July 24, 2017—after the Notice of Determination was issued. As the Tax Court received that letter within 30 days of the Notice of Determination, the Court—in January 2018—filed the letter as a new petition, docketed at 388-18, relating back to the letter’s date, July 24, 2017.

Levies started soon thereafter in February 2018.  One potential explanation is that the Service’s computers simply saw that the levy prohibition from docket 12702-17L had been removed. And because of the unorthodox way in which the new levy prohibition in docket 388-18L arose, they didn’t pick it up. Another could be that the Notice of Determination was listed in Petitioner’s 2012 account transcript as having been issued on September 26, 2017—not July 18, 2017, as it actually was. So perhaps the Service never picked up that a Petition was filed in the first place. The Court and Respondent’s counsel believe that the first explanation is correct, as explained in this order. Respondent’s counsel further assured Judge Urda that this unlawful levy was an “isolated error.”

However, Petitioner sent the Court another set of documents late this February, which included a levy notice for 2012, 2013, and 2014, dated May 18, 2018 to Petitioner’s employer—a separate levy from the Social Security levy previously disclosed.

To sort this out, Judge Urda orders (1) that Respondent may not levy on Petitioner for 2012 through 2014 while this case is pending; (2) that Respondent’s counsel file Petitioner’s Account Transcripts for 2012 through 2014 with the Court; and (3) that Respondent file a status report clarifying a number of uncertainties remaining in this matter, including when Respondent’s counsel first knew that a levy notice was sent to Petitioner’s employer. On March 18, Respondent’s counsel filed a reply. Unfortunately, I cannot access the reply’s text without traveling to Washington, D.C. or shelling out 50 cents per page for a copy of the reply.

Docket No. 9671-18L, Denton v. C.I.R. (Order Here)

Finally, another CDP case, this time from Judge Gustafson. Here, Respondent filed a motion to dismiss for lack of jurisdiction as to the two tax years at issue: 2005 and 2015. Judge Gustafson dismissed 2015; that year just came out of IRS Appeals on a Notice of Determination—long after the petition in this case was filed. Judge Gustafson advised Petitioners to file a new petition should he wish to litigate that year.

For 2005, the Service both issued a notice of intent to levy and filed a notice of federal tax lien. For the levy, Respondent argued the Court lacked jurisdiction because Petitioners did not timely request a CDP hearing. Specifically, Respondent stated that it issued the notice on February 5, 2009, making any CDP request due on March 9, 2009. Also in the record was an envelope from Petitioner to the Service dated March 18, 2009. On this evidence alone, Respondent’s argument seems strong.

But complicatedly for Respondent, they acknowledge that a CDP hearing occurred during 2017 and 2018, and that both 2005 and 2015 were considered. The Service then issued a “Notice of Determination” listing 2005 in May 2018. That’s quite a delay from when the Notice of Intent to Levy was purportedly issued.

Delay or not, Judge Gustafson notes that ordinarily, the Tax Court does not look behind a Notice of Determination based on “facts regarding procedures that were followed prior to the issuance of the notice of determination rather than on the notice of determination itself.” Lunsford v. C.I.R., 117 T.C. 159, 163 (2016). If that’s true, then the Court could, Judge Gustafson suggests, have jurisdiction over 2005. He necessarily implies, therefore, that that is so, even where the Service presents evidence indicating that the CDP hearing request itself was untimely. Therefore, Judge Gustafson denied the motion without prejudice as to 2005.

The Service also filed a NFTL for 2005, which by its terms required a response by April 2, 2009. The Court notes that evidence of a CDP request exists in the envelope dated March 18, 2009, so it’s not clear from the record that no request was filed. The Court also dismissed Respondent’s alternative argument that the lien self-released 10 years after filing. While true, taxpayers may request collection alternatives or other relief in response to a NFTL through a CDP hearing. Because the record was unclear on those points, Judge Gustafson likewise denied the motion to dismiss as to the 2005 lien hearing.