Subpoenas in the Virtual Tax Court Age: Designated Orders 9/28/20 to 10/2/20

The focus for this blog post will primarily be about how the Tax Court is handling subpoenas in this age of virtual trials. There are some miscellaneous designated orders I will also touch on for the week I monitored. Also for those of you keeping track – I also monitored the week of August 31 through September 4, but did not write a report because there were no designated orders submitted that week. Perhaps the judges were ready for the Labor Day holiday?

Subpoenas and Virtual Tax Court

Docket Nos. 14546-15, 28751-15 (consolidated), YA Global Investments, LP f.k.a. Cornell Capital Partners, LP, et al., Order available here.

I was listening to the UCLA Extension’s 36th Annual Tax Controversy Conference’s panel on “Handling Your Tax Court Matter in the Covid-19 Environment” on October 20. The panel was moderated by Lavar Taylor (Law Offices of Lavar Taylor) and panelists were Judge Emin Toro (U.S. Tax Court), Lydia Turanchik (Nardiello and Turanchik), and Sebastian Voth (Special Trial Counsel, IRS Office of Chief Counsel). The topic turned to subpoenas and Ms. Turanchik cited the YA Global order in question as being a good example of the Tax Court’s, specifically Judge Halpern’s, approach to subpoenas in our virtual Tax Court era.

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YA Global made a previous appearance in designated orders write-ups concerning scheduling issues in the pandemic. Now, the issue is that that the IRS requested an order setting the cases for remote hearing and a notice of remote proceeding in order to provide a return date and location for subpoenas duces tecum that they would like to issue. The petitioners requested a protective order precluding the IRS from issuing the subpoenas.

First of all, the Tax Court has a document with instructions on subpoenas for remote proceedings. With respect to subpoenas for production of documents from a third party, if a Tax Court litigant needs to obtain documents from a third party for use in a case set for trial, the litigant should, no later than 45 days before the trial session, file a motion for document subpoena hearing. If the motion is granted, the judge will issue an order setting the case for a remote hearing and issue a notice of remote proceeding. The hearing date will be approximately two weeks before the first day of the trial session. The litigant should immediately serve the subpoena for documents on the third party. The third party may voluntarily comply with the subpoena by delivering the documents and the Court will cancel the hearing. Otherwise, the third party may (assuming the party does not object to the subpoena) elect to present the relevant documents on the day of the hearing.

In the YA Global order, the IRS followed that procedure – their motion requested an order setting these cases for a remote hearing and a notice of remote proceeding. The notice then provides the date and location for the subpoenas duces tecum that the IRS would like to issue. That motion, however, triggered a motion from the petitioners for a protective order on the grounds that the IRS is trying an end run around the discovery deadline that the parties agreed to (May 1, 2020, which the Court incorporated into its pretrial order).

Tax Court Rule 147 is the rule on subpoenas, but we need some guidance on how it applies to this situation. Rule 147(d) subpoenas are time-bound by the period allowed to complete discovery, but Rule 147(b) subpoenas are not limited in the same way. Those subpoenas command the person who receives the subpoena to appear at the time and place specified (a hearing or trial). Does that mean a 147(b) trial subpoena allows a party to have additional discovery time?

There is relatively little authoritative Tax Court precedent regarding claims of misuse regarding 147(b) trial subpoenas. In Hunt v. Commissioner, the Court quashed subpoenas issued on the eve of trial for large quantities of documents not reviewed during discovery as impermissible. There, the Court stated “respondent simply cast an all-encompassing net in the search for information with which to build a case. Rule 147 was not intended to serve as a dragnet with which a party conducts discovery.”

There is, instead, larger authority in the Federal Rules of Civil Procedure (regarding civil actions and proceedings in United States district courts). In fact, when the Tax Court set up Rule 147, the goal was to have a rule governing subpoenas substantially similar to Fed. R. Civ. P. 45 (“Subpoenas”). Rule 45 has been subsequently amended to authorize the issuance of subpoenas to compel nonparties to produce evidence independent of a deposition. This is a different direction from Tax Court Rule 147.

Yet, it “is black letter law that parties may not issue subpoenas pursuant to Federal Rule of Civil Procedure 45 ‘as a means to engage in discovery after the discovery deadline has passed’” (Joseph P. Carroll Ltd. v. Baker). To expand and explain, Moore’s Federal Practice – Civil states “once the discovery deadline established by a scheduling order has passed, a party may not employ a subpoena to obtain materials from a third party that could have been procured during the discovery period.”

In reviewing the IRS actions in these cases regarding the subpoenas, some fall in the category of opportunities passed up for discovery and others allude to a purpose to learn facts or resolve uncertainty. The Court states those subpoenas fall under the current Tax Court Rules for discovery, which apply appropriately here. Overall, the Court denies the IRS motion as the subpoenas would be used for an inappropriate purpose, the conduct of discovery.

Only one subpoena is excepted from the denied subpoenas. This subpoena is intended to facilitate authorization to view and potentially use documents already produced by that individual that he may not have been authorized to produce previously. The proposed IRS subpoena is to rectify the individual’s possible lack of authority in producing documents that the IRS already has in hand and may use (presumably at trial). The Court is allowing this subpoena as an appropriate use of a trial subpoena. The Court then grants the IRS motion to set a remote hearing and notice of remote proceeding with regard to that one third party subpoena.

Miscellaneous Cases

Another Scattershot Petition

  • Docket No. 13130-19, William George Spadora v. C.I.R., Order available here.

In my last designated orders post, I wrote about scattershot petitions. Bob Probasco made a comment and I sent him a follow-up email. His theory is that these scattershot petitions may actually be a promoter scheme for tax protestors to get the dismissal in Tax Court and then file a refund suit in district court or the Court of Federal Claim with the argument that “the IRS has no jurisdiction” and the usual result of no success in that court either. That may be a possibility as there seem to be several such petitions filed in the Tax Court.

Which brings us to Mr. Spadora (whatever his motivations are) as his petition refers to tax years 2000 through 2018.  The IRS checked and there were notices of deficiency for 2004 and 2010-2012 only, but all of those were expired.  Instead of immediately granting the IRS motion to dismiss, Judge Gale strikes the case from the San Francisco calendar scheduled for October 19. The petitioner has until November 18 to respond with his reasoning why the Court has jurisdiction and to submit the applicable notices of deficiency or determination.

A Day Late and a FedEx Receipt Short

  • Docket No. 13949-19, Artur Robert Smus v. C.I.R., Order of Dismissal for Lack of Jurisdiction available here.

Mr. Smus filed his Tax Court petition 91 days after the Notice of Deficiency was sent by the IRS. He was supposed to file a response to the IRS Motion to Dismiss for Lack of Jurisdiction, but did not. He was also supposed to appear at the remote hearing for Denver to explain at the hearing regarding the motion to dismiss. Mr. Smus did not appear so the IRS Counsel explained to the Court about the attempts to reach him and why the motion should be granted. The Court tried to contact Mr. Smus, but they were unsuccessful.

What did Mr. Smus do? He electronically filed his response to the motion ten minutes prior to the scheduled remote hearing. In his response, he states he petitioned the Court on the evening of July 23, 2019 (day 90), but FedEx did not ship out the package until the morning of July 24 (day 91). He is not able to find his FedEx receipt. Because of his late response and failure to appear at the hearing combined with admitting the mailing occurred on the 91st day, the Court grants the motion to dismiss for lack of jurisdiction.

My advice? Do not wait until the last minute to file the Tax Court petition. If you are close to the deadline, you have to make sure the filing gets done absolutely right.

How Old Is Old and Cold?

  • Docket Nos. 27268-13, 27309-13, 27371-13, 27373-13, 27374-13, 27375-13 (consolidated), Edward J. Tangel & Beatrice C. Tangel, et al., v. C.I.R., Order available here.

The Tangels appeared in a prior designated orders post I wrote concerning how the IRS was nonresponsive to discovery requests in this case about the research credit. This time, they are seeking to seal 2,472 trial exhibits. 2,417 relate to “Terminal High Altitude Area Defense” while the other 55 relate to “Capstone” (no, not Treadstone). About 75% of the first group of exhibits have a warning stamp concerning technical information where the export is restricted by federal law. The petitioners argue that disclosure of the proprietary information will irreparably harm their business, violate trade secret protections, and may impact national security.

In the Court’s analysis, there is not enough evidence to support those claims. The motion for protective order is two pages long and without supporting affidavits – a party must provide appropriate testimony and factual data to support claims of harm resulting from disclosure and not rely on conclusory statements.

Next, the tax years at issue are 2008-2010 so the documents in question are presumably at least 10 years old. Sensitive documents lose saliency over time and become “old and cold.” In other cases, documents that were older than certain years (examples: 5, 7, or 10 years old) were excluded from being confidential information. The petitioners have not addressed how the age of the documents affects their confidential nature.

The Court was inclined to believe that a protective order may be necessary, but not for all 2,472 documents. The Court proposed that the parties work to submit a joint protective order or to submit their own separate proposed protective orders if they cannot agree. The current motion for a protective order from the petitioners was denied.

The Effect of an Order to Show Cause, Designated Orders August 24-28 and September 21-25, 2020

Docket No. 14410-15, Lampercht v. CIR (order here)

Up until now, I was the only designated orders’ author who had yet to cover this case which has had eight orders designated in it since March of 2018. The case’s recent orders have addressed discovery-related matters, and in this order on petitioner’s motion, the Court reconsiders a previously issued “order to show cause.” It decides to withhold its final ruling in part to allow more time for petitioners to comply, discharge it in part, and make it absolute in part.

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The Tax Court strongly encourages parties to engage in informal discovery, so it is somewhat rare to encounter an order related to discovery.  Tax Court Rule 91(f) allows the Court to issue an “order to show cause” related to stipulations when one of the parties “has refused or failed to confer with an adversary with respect to entering into a stipulation” or “refused or failed to make such a stipulation of any matter.”

The order describes the effect an “order to show cause” has on the parties and the proceedings. The case involves several different types of documents all of which appear to be difficult obtain and some which may not even exist. The first documents addressed by the Court relate to property owned by petitioners in another country. Earlier on, petitioners conveyed that their ability to obtain the documents was symmetrical to the IRS’s ability, so the Court ordered petitioners to execute a waiver which the IRS could use to obtain the documents. Even with the waiver, the IRS was unsuccessful but learned that petitioners could obtain the documents by requesting them from the local authorities where the property is located. As a result, the Court sets a specific date for the petitioners to do this or else the order will be made absolute.

Next, petitioners state that certain business-related records do not exist, and they wish to provide affidavits instead. The IRS challenges the sufficiency of the affidavits, but the Court says the IRS can press his criticisms of petitioners’ explanation at trial and dismisses the “order to show cause” as it relates to these items.

Finally, petitioners contend that they were unable to get necessary records from their bank in order to participate in the IRS’s voluntary offshore disclosure program. The IRS also needs a waiver from petitioners to attempt to obtain the bank records. The petitioners executed a waiver but it was ultimately returned because it was not notarized, and petitioners failed to provide the identity verification requested. The Court makes the “order to show cause” absolute as it relates to this item.

What is the effect of an “order to show cause” being made absolute? In this case, it means that petitioners are precluded from offering any evidence at trial with the respect to the item or the inexistence of the item. In other words, the Court will not allow petitioners to use their alleged inability to the obtain records serve as a reason for their inaction at trial.  

Docket No. 13892-19, Malone v. CIR (order here)

This next order involves the Court’s concern with a petitioner’s capacity to engage in litigation and a conflict that may arise if a certain family member tries to help him.

The tax return at issue in the case is a section 6020(b) substitute for return which didn’t account for any of petitioner’s business expenses. The case was scheduled for trial in June 2020 but was delayed due to Covid-19 and since then parties have kept the Court apprised of their progress in monthly status reports. In the reports, petitioner’s counsel repeatedly states that petitioner has not made much progress with retrieving and organizing documents due to side effects of brain surgery he had in February 2019.

Since the petitioner has not made much progress, the Court is concerned with petitioner’s capacity under rule 60(c). Petitioner’s counsel states that petitioner’s family is helping him gather documents and information but does not identify which family members are assisting him which also raises the potential conflict concern for the Court.

Petitioner may wish to challenge the IRS’s determination of his filing status. This is permitted because a substitute for returns does not constitute “separate” returns for purposes of section 6013(b) (see Millsap v. Commissioner, 91 T.C. 926 (1988)).  The 6020(b) substitute for return used married filing separate status, so the Court speculates that if petitioner challenges his filing status and files a married filing joint tax return, then petitioners’ spouse may have a conflict of interest in helping him gather documents and information, unless his spouse disavows themselves of innocent spouse relief.

Without additional information, the Court isn’t sure that petitioner’s counsel can proceed without the appointment of a representative or if petitioner does not have such a duly appointed representative, a next friend or guardian ad litem.

To resolve their concerns the Court specifically asks whether petitioner was married during the year at issue, and if so, the status of petitioner’s spouse’s tax liability that year, including whether petitioner plans to submit a joint return. The Court also asks whether petitioner’s spouse has a conflict of interest or potential conflict of interest that may prohibit them from acting on petitioner’s behalf.

Docket No. 6341-19W, Sebren A. Pierce (order here)

This order provides the Court with another opportunity to reiterate its record rule and standard of review in whistleblower cases. The Court also cites its Van Bemmelen opinion which Les mentions in his very recent post on the record rule here.

In this designated order, the Court is addressing petitioner’s motion for summary judgement. Petitioner’s case alleged that a certain State had defrauded taxpayers of more than $43 billion in connection with the incarceration of prisoners in that State who were wrongfully prosecuted. The whistleblower office’s final decision rejected the claim “because the information provided was speculative and/or did not provide specific or credible information regarding tax underpayments or violations of internal revenue laws.”

After pleadings were closed, petitioner filed a motion for summary judgment asserting that he is entitled to a whistleblower award of 15% to 30% of the amount and requests an advance payment of $20 million, with any discrepancies in the award amount to be resolved by IRS audit.

The Court goes on to explain that is not how summary judgment works in whistleblower cases. The Court cannot determine that petitioner is entitled to an award and force the IRS to pay up, because it is not a trial on the merits. The Court explains that the de novo standard of review petitioner desires is not possible.

Orders not discussed, include:

  • Docket No. 1781-14, Barrington v. CIR (order here), petitioner’s motion to compel is denied because it is inadequately supported since petitioner cannot yet show that the IRS has failed to respond to formal discovery.
  • Docket No. 18554-19W, Wellman v. CIR (order here) the IRS’s motion for summary judgment in this whistleblower case is granted and petitioner does not object.
  • Docket No. 13134-19L, Smith v. CIR (order here), the IRS’s motion summary judgment is granted in a CDP case where petitioners submitted an offer in compromise but were not current with estimated tax payments.

Scattershot Petitions and Valuing a Collection: Designated Orders 8/3/20 to 8/7/20

This blog post covers the 3 designated orders that were released during the first full week of August.  All of the petitioners were unrepresented and there are some basic mistakes they made.  Since this blog post addresses some issues that have been analyzed before, it is my hope that providing this further analysis will assist some unrepresented taxpayers from avoiding these mistakes in the future.  The topics include scattershot petitions and collection due process, with a specific focus on collection valuations.

Scattershot Petitions

These two cases I will discuss involve what I am terming “scattershot petitions.”  These are petitions that were filed that cover a broad number of tax years.  When the petitioners file these scattershot petitions, maybe there is a connective document like a notice of determination that would validly allow the petitioner to continue in Tax Court.  Rather often, when there was a valid notice of determination, the ninety-day period for filing a petition based on that notice has already expired.  In essence, we have a first-time hunter that runs into a field and fires a shotgun without applying the concept of aiming the shotgun.  To change metaphors, it seems to be the “throw it at the wall and see what sticks” method of court filing.

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This then becomes a waste of resources because both the Tax Court and the IRS have to respond to the petition.  First, the IRS has to research regarding all of the tax years.  Was there a notice of deficiency filed for any of the years mentioned in the petition?  If so, did the period for filing a petition based on the notice expire before the petition was filed?  The IRS files regarding that information to the Tax Court and the judge writes a corresponding order.  Going through this process takes time and resources that would not have been wasted if the petitioner better understood the process and filed a valid petition.  This seems to happen often enough that they regularly appear in designated orders such as the two cases dealt with by Judge Buch here.

  • Docket No. 6600-19, James Matthew Enright v. C.I.R., Order and Order of Dismissal available here.

In the first case, Mr. Enright filed a petition to place at issue tax years 2000 through 2019.  He stated, “Never received the notice of Deficiency; [n]ever received the notice of Determination.”  However, this is not the first time Mr. Enright filed such a broad petition.  He had two prior Tax Court cases that attempted to place at issue tax years 1958 through 2017.  There had been notices of deficiency issued for 2001, 2003, and 2004, but the petition was too late for those years.  Both parties moved the Court to dismiss the case and the Court does so.

            However, since Mr. Enright is a repeat customer, he gets a door prize.  The Court may impose a penalty when a taxpayer position is frivolous or groundless under IRC 6673 up to $25,000 (for more on 6673 penalties, look here).   As the judge notes the IRS had to review 20 years of records and had exhibits over 70 pages, he deems that a sanction is appropriate, ordering a $2,000 penalty (which I thought was only mildly harsher than a slap on the wrist).

  • Docket No. 18571-19, Craig Douglas Hoglund & Christine Joan Hoglund v. C.I.R., Order available here.

The second case brings up different issues, partly because it is due to issues related to married couple tax filing. 

The Hoglunds did not file a timely tax return for 2016.  As of September 3, 2019, neither spouse had filed a 2016 tax return, but that is the date the IRS issued a notice of deficiency addressed solely to Mrs. Hoglund.

In response, the Hoglunds filed a joint petition with the Tax Court.  With regard to the years of the notice, they listed “2006, 2007, 2008, 2009, 2010, 2013, 2014, 2016” and part of the reason in their narrative explanation of why they disagree, they wrote that they “always file jointly.”

The IRS filed a motion to dismiss for lack of jurisdiction with regard to Mr. Hoglund and to dismiss and strike for lack of jurisdiction with regard to Mrs. Hoglund concerning all tax years except for 2016.  In the motion to dismiss, the IRS notes the Hoglunds have already had several Tax Court cases where they tried to place multiple tax years at issue.  One example is docket number 7171-19L (also with Judge Buch), where the Hoglunds tried to place tax years 2006 through 2014 at issue, but the Court dismissed all years but 2008 through 2010 (the only years addressed in the notice).

The Hoglunds made two arguments in response to the IRS motion.  The first argument is that their jointly filed tax returns throughout their marriage implies the IRS must send them a joint notice of deficiency.  The second argument is that years not under consideration for a particular tax year’s hearing are considered in making a determination.

For the first argument, the Court points out that filing a joint tax return is an elective choice.  At the time of the notice, the Hoglunds had not filed a joint tax return so it was proper for the IRS to issue the notice to Mrs. Hoglund solely.

Regarding the second argument, the Court notes that the Hoglunds are correct in that the Court can take into account tax years that are not under consideration regarding reviewing a particular tax year.  That does not mean that gives the Court jurisdiction over those other tax years.  IRC section 6213(a) only gives the Court jurisdiction to redetermine a deficiency as set forth in the notice of deficiency.

In summary, the Court in this case only has jurisdiction based on the notice of deficiency for tax year 2016 and taxpayer Mrs. Hoglund only.  The Court may take into account other tax years relating to 2016, but that does not afford the Court jurisdiction over those years.

As a result, the arguments from the Hoglunds failed and the Court granted the IRS motion to dismiss regarding Mr. Hoglund and tax years for Mrs. Hoglund outside of 2016.  The caption of the case is also amended so that Mrs. Hoglund is now the sole petitioner.

No mention of a 6673 penalty here, though I think it would have been warranted.

Valuing a Collection

Docket No. 10242-19, Craig A. Sopin & Ruth Sopin v. C.I.R., Order and Decision available here.

This case generally fits into a recurring theme regarding Collection Due Process (CDP) cases.  To give the quick summary – petitioner had a lien or levy issue, did not provide all the documents requested by the IRS, files a petition with the Tax Court based on the determination, the Tax Court finds there was no abuse of discretion by the examiner so the petitioner loses upon review at Tax Court because the judge granted the IRS motion for summary judgment.

            What is different with the Sopins?  Let’s dig into the details.  They filed a tax return for the 2016 tax year with a liability of $38,528.  After that amount was unpaid, the IRS submitted both a notice of intent to levy and a notice of federal tax lien.  The Sopins timely filed a Form 12153 to request a CDP hearing.  For the CDP hearing, the IRS settlement officer requested that the Sopins submit their delinquent 2017 tax return, a Form 433-A (collection information statement), a Form 12277 (application for withdrawal of filed notice of federal tax lien), and proof of estimated tax payments for tax year 2018 to date.

            The Sopins submitted their delinquent 2017 tax return, which had a balance due.  The Sopins got a one-week extension in order to fill out Form 433-A, but they never submitted the forms 433-A or 12277.  When they filed their 2018 tax return, also delinquent with a balance due, they had not made any quarterly estimated payments.  The predictable results for the Sopins went as I detailed in the first paragraph – no relief under Collection Due Process leading to the Tax Court case where their noncompliance led to the Court granting the IRS motion for summary judgment.

What I found the most interesting was the sentence in the order – “Mr. Sopin advised that he was unable to complete a Form 433-A because it was too difficult to assess the value of the assets in his collection of memorabilia from the sinking of the RMS Titanic.”  What’s this?  He is a collector of memorabilia related to the Titanic?  Nowhere else in the order does it mention any other items regarding Mr. Sopin’s collection, but I thought it was something worth examining.

Generally, I was a bit curious about how the IRS treats collections.  I am one of those in the world with a hobby collection – in my case, comic books and other pop culture items.  When turning to IRS Form 433-A, section 19 requires a taxpayer to give a value for personal assets.  The section looks for amounts regarding “furniture, personal effects, artwork, jewelry, collections (coins, guns, etc.), antiques or other assets.”  What should be done to respond to the IRS regarding the current fair market value of such a collection?

When I turned to the Internal Revenue Manual for assistance in valuing Mr. Sopin’s Titanic collection, I found Internal Revenue Manual section 5.8.5.4.  It provides that the IRS can turn to “[h]omeowners or renters insurance policies and riders to identify high value personal items such as jewelry, antiques, or artwork.”  With regard to other high value assets, the IRM suggests appraisals for the value of a business, vehicle, or real estate.

In section 5.8.5.11, it states, “The taxpayer’s declared value of household goods is usually acceptable unless there are articles of extraordinary value, such as antiques, artwork, jewelry, or collector’s items. Exercise discretion in determining whether the assets warrant personal inspection.”

Additionally, when looking at an Offer in Compromise, Section 3 is for Personal Asset Information.  One part of the section is about other valuable items “(artwork, collections, jewelry, items of value in safe deposit boxes, interest in a company or business that is not publicly traded, etc.)”.  When listing such an item, the calculation is to take the current market value, multiply it by .8 (this is to determine the quick sale value – a calculation of 80% of fair market value – see IRM 5.8.5.4.1), then subtract the loan balance to arrive at the value of the valuable item.  After adding up the various valuable items, take the entire amount and subtract $9,690. 

In other words, if you are dealing with a client with a collection that is considering an Offer in Compromise, that is not necessarily a deal-breaker.  While we often value our possessions highly, it is worth remembering what amount we can get for them when sold.  In IRM 5.8.5.13, they define the fair market value as “the price at which a willing seller will sell and a willing buyer will pay for the property, given time to obtain the best and highest possible price.”  When it comes to personal property, the common thought is how much the item(s) would sell for at a garage sale or flea market setting.  For a client who highly values a collection, often times it may not be worth $9,700 or more and essentially gets devalued in an Offer in Compromise.

Another consideration is that there are taxpayer protections resulting from the IRC 6343 levy exemptions that protect taxpayer assets such as personal property that also help to preserve items such as taxpayer collectibles or other valuable items.

I am not sure if Mr. Sopin had highly valuable personal items where he should have gotten an appraisal for his Titanic collection, but that might have been a possibility.  Whatever method Mr. Sopin used, he should have found a value for the Titanic collection and submitted the Form 433-A (and other documents) to the IRS by the deadline.

And the moral of the story?  Provide all of the requested documents to the IRS and meet the deadlines.  It does not mean you automatically win your CDP case in Tax Court, but it likely prevents you from an automatic loss of the case if you do.

Designated Orders June 15 – 19 2020 Part II of II: Tax Procedure Final Exams!

The prior designated order post focused heavily on a new issue in the procedural world: whether the Tax Court has jurisdiction to issue a writ of mandamus ordering the IRS to issue a Notice of Determination in a whistleblower case. The remaining orders of that week don’t break such new ground, but do bring up a lot of fun procedural issues. Indeed, one of the orders reads like a potential Tax Procedure Final exam and provides helpful refreshers to practitioners as well.

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Tax Liens and Tax Procedure: A Game of Inches. O’Nan v. C.I.R., Dkt. # 5115-17 (here

Convoluted fact patterns and the importance of dates/timing are hallmarks of law school exams. I still recall my exact thoughts after reading through the prompt for my Wills and Trusts exam: that would never happen. No one in history has ever written their “will” on a cocktail napkin, stepped outside the bar and been hit by a car. [Note: I may be misremembering the exact facts of my final exam, but it wasn’t far off from that.] The facts in O’Nan are not quite so far-fetched, and since it actually happened may serve as a useful template (or rebuke) to stressed out law students complaining about endless hypos. 

In O’Nan, husband and wife had joint liabilities for 2012 and 2013, which were assessed by the IRS on November 18, 2013 and November 17, 2014 respectively. The order doesn’t specify what avenue the IRS took to get to assessment (e.g. deficiency procedures or summary assessment of amounts listed on the returns), but judging from how quickly after the filing deadline these assessments took place, I’d be willing to bet on “summary” assessment. That little implicit fact might just matter… But more on that later.

Anyway, the O’Nans had liabilities assessed for both 2012 and 2013 as of November 17, 2014. On that same day the IRS mailed a CP14 letter to the O’Nans for 2013 demanding payment. It is unclear when the 2012 demand for payment was mailed, though one would assume it was earlier than that: the remainder of the order focuses predominantly on 2013. 

Sadly, only eight days after the notice and demand letter was sent (November 25, 2014) Mr. O’Nan passed away. Months pass, and people focus on things more important than taxes for the remainder of 2014.

On March 11, 2015, Ms. O’Nan records a “Survivorship Affidavit” in the county where the marital home is located. This effectively means that she has an undivided property interest in the home, whereas before it was a joint tenancy. Shortly thereafter (April 28, 2015), the IRS filed a Notice of Federal Tax Lien in that same county, though the order does not specify for which tax year (i.e. 2012, 2013, or both) or for which taxpayer (i.e. Ms. O’Nan, Mr. O’Nan, or both). More facts a discerning student may underline.

Possibly spooked by that Notice of Federal Tax lien, Ms. O’Nan filed an Innocent Spouse request on May 6, 2015. A little over a month after filing the Innocent Spouse request, Ms. O’Nan sold the marital home for (at least) a gain of $123,200… which promptly goes to the IRS in full satisfaction of the 2012 and 2013 joint liabilities.

An unhappy result for Ms. O’Nan I’m sure, but (maybe?) not the end of the story. After all, the Innocent Spouse request is still outstanding, and a couple years later (February 2017) the IRS issues the following determination: “Good news: you are granted full relief for 2013 and partial relief for 2012! Bad news: you are entitled to $0 in refund for either of those years.”

Apparently Ms. O’Nan wasn’t happy with a piece of paper from the IRS effectively saying “We’ve relieved you from the joint tax debt that was paid through the sale of your home, but you aren’t getting any of it back.” So she filed in Tax Court, bringing us to the present day and this order. And, just to add a little more procedure in the mix, this order is only on a motion for partial summary judgment by the IRS on the question of when the federal tax lien (FTL) arose under IRC § 6321.

That narrow question actually has a pretty easy answer. The broad (“secret”) federal tax lien arises at the date of assessment, so long as notice and demand for payment is made within 60 days of assessment. See IRC § 6303. If the notice and demand is properly made within those 60 days, the effective FTL date “relates back” to the date of assessment. 

Looking only at the 2013 tax year (the order is mostly silent about 2012) the assessment took place on November 17, 2014 and the notice and demand for payment was mailed on the same day. Accordingly, in this instance there isn’t even the need to “relate back” to the assessment date from a later-mailed notice and demand. The federal tax lien arose on November 17, 2014. Easy answer on the main issue, I’d say, but let’s look at some wrinkles:

Bonus points to students for those who advised putting the IRS mailing of the Notice and Demand at issue. If the Notice and Demand for payment were severely defective (or never actually mailed), it is possible (but by no means guaranteed) that in certain circuits the federal tax lien would not arise on November 17, 2014. Frankly, I think you could write a whole test question just on what the effects of failing to properly mail a Notice and Demand for payment are. It isn’t always clear or consistent.

Extra-special bonus points to students (or practitioners) that note potential evidentiary issues with the Notice and Demand for payment. The IRS provided transcripts as proof of proper mailing, but the IRS gets things wrong all the time -particularly with dates on notices (see Keith’s post here for an instance where the IRS effectively decided it was OK to send notices with bad dates). Judge Panuthos notes, however, that petitioners did not raise any arguments challenging the presumptively correct mailing record, so the argument essentially falls by the wayside. 

Note, however, that in this instance the Petitioner actually does raise an argument about the Notice and Demand. But it is a purely legal argument about the notice being untimely because it was issued too early after assessment. This legal argument is quickly and correctly dismissed as being a strained and improper reading of the statute. In my experience, I would say that a law student is more likely to raise that (doomed) legal argument than the more promising factual one: law school tends to focus on laws more than facts, after all.

Ok, so we’ve solved the narrow issue before Judge Panuthos here, which is when as a matter of law the federal tax lien came into existence. (It just so happens that Judge Panuthos worked extensively on collection matters as an attorney with Chief Counsel before becoming a Tax Court Judge, so he is likely better suited than most to wade through these tricky lien issues. Thanks to Keith for alerting me to this bit of information.) Partial summary judgment granted. But what remains to be disposed of in this case? What other Federal Tax Procedure Final Exam prompts might we take from this order? 

First off, consider whether and why the precise date of the federal tax lien even matters in this instance. Recall that the IRS filed a Notice of Federal Tax Lien (NFTL) before the property was sold, and also that Ms. O’Nan was liable for the entire 2012 and 2013 debt. Recall that unlike a “secret” tax lien, an NFTL takes priority over a for-value purchaser. See IRC § 6323(a). Wouldn’t the IRS be entitled to the proceeds regardless of the notice and demand issue?

I think the answer is “yes,” but a little more analysis is helpful to tie up potential loose ends. Those loose ends only really exist since the IRS granted innocent spouse relief, effectively cutting ties that otherwise bind Ms. O’Nan to joint and several liability.

As is frequently mentioned on this blog and elsewhere, the reach of the federal tax lien (FTL) is exceedingly broad. It is certainly broad enough to attach to Mr. O’Nan’s interest in the marital home before he passed away… so long as it arose before he passed away (i.e. when he still had an interest). Just as important as the breadth of the FTL is its resilience -that it sticks with real property that changes ownership through gift or, in this case inheritances. (See IRC 6323(h)(6), defining “purchaser” (one of the categories that otherwise defeats an FTL) but would not include a conveyance by inheritance.) 

Putting it all together, Ms. O’Nan needs to show that at the time the FTL came to exist her late-spouse had no interest in the marital property that the FTL could “attach” to. If that is the case, Ms. O’Nan still owes the tax liabilities but (critically) when the home is sold the proceeds going to the tax debts could only be attributable to her. That sets us up for her innocent spouse claim: the payments are solely attributable to Ms. O’Nan, who the IRS concedes doesn’t owe the tax (i.e. granted relief from liability). Unless the IRS can say “actually, the payments that fully eliminated the (previously) joint tax debt were attributable to the lien from your late spouse” it certainly seems like a refund would be in order.

Which gets to the final prompt: the circumstances for getting refunds in innocent spouse cases. For ultra-special-bonus-points we go all the way back to why the method of assessment matters. If the liability was from a summary assessment (i.e. tax reported on the return) then the only “type” of innocent spouse relief available under IRC § 6015 is “equitable” relief (IRC § 6015(f)) because it must be an “underpayment” and not an “understatement.” If it is an understatement you (potentially) get into other factually thorny issues about whether (b) or (c) relief is available.

This matters mostly in the context of getting a refund. You can only get 6015(f) relief if you are not entitled to relief under 6015(b) or (c). This is important because refunds are available under (f), whereas they are not available under (c) which is generally the easiest variety of relief to get. And if the only reason you can’t get (c) is because you want a refund, the Treasury Regulations provide that you are out of luck (see Treas. Reg. § 1.6015-4(b)). As blogged on previously here, the IRS also sometimes appears to default to “c” relief causing exactly these sorts of problems (it doesn’t appear to me that simply checking the “I’d like a refund” box on Form 8857 fixes the problem)

The IRS used to take a much stingier line on when you could get a refund under IRC 6015(f). Current IRS guidance (Rev. Proc. 2013-34), however, has liberalized such that refunds are generally available if there is a timely claim and the amounts paid are attributable to the requesting spouse. Which neatly brings us all the way back to why the FTL timing matters so much… determining which spouse the payment could be attributable to. After all, both spouses legitimately owed the tax at the time the IRS swooped in on the sale proceeds.

There are, undoubtedly, other questions and prompts one can pull from this scenario. In particular, the order provides look at the intersection of state law for determining “property rights” and federal law for how the FTL attaches to those rights. But those are prompts for another day.  

Theft Loss Issues with a Side of Tax Procedure. Bruno v. C.I.R., Dkt. # 15525-18 (here)

The fact-intensive nature of “theft losses,” as well as its interplay with other code sections (itemized deduction limitations, net operating losses, etc.) tends to make for good Federal Income Tax test prompts. And this order is no different, involving an alleged theft loss of roughly $2.5 million(!). The facts in this case are also sordid enough to keep students interested: the “theft” at issue arises from a divorce and supposed conspiracy of the ex-husband to hide assets from petitioner through a series of entities owned by the ex-husband’s family. 

Plenty of interesting stuff on the substantive question of whether (and critically, when) a theft loss may have occurred. But since this is a Tax Procedure blog, it seems fitting to focus on the procedural issue at play giving rise to the order at hand. 

The order from Judge Lauber tells the parties to file a supplemental stipulation of facts. Why not just parse out the facts that are needed in trial, you ask? Because the parties filed a motion to submit the case under Tax Court Rule 122 (i.e. “fully stipulated”). Judge Lauber is basically saying “What you’ve stipulated to isn’t enough for me to know if/when the theft loss is appropriate. Give me more.”

And here is where we get to tax procedure. Recall that the burden of proof is generally on petitioner, challenging the Notice of Deficiency, to prove that she is entitled to the theft loss. (See Welsh v. Helvering, 290 U.S. 111 (1933)) This does not change under Rule 122 submissions: subparagraph (b) of Rule 122 pretty specifically states as much. If the stipulations aren’t enough to show one way or another if the theft loss deduction is appropriate, shouldn’t the default be “petitioner loses?” 

Probably yes, but that doesn’t mean the Tax Court has to jump to that conclusion. And power to Judge Lauber for not doing so. As noted before (see post here), the Tax Court generally wants to get things right, and not to decide based on foot faults. Ruling based on insufficient stipulated facts, particularly where the parties may well end up agreeing on the facts that matter, may not quite be a foot-fault, but certainly seems unfair without first giving the parties a chance to fix the issue. If they don’t agree to the stipulated facts, however, I think there are problems for Petitioner. Until then, however, Judge Lauber seems to take the best approach. (Also (in my humble opinion) I think the Tax Court may be more willing than usual to accept and work with Rule 122 cases during this time of “virtual trials.”) 

Remaining Designated Orders – Conservation Easements That Sound Too Good to be True (Little Horse Creek Property, LLC v. C.I.R., Dkt. # 7421-19 (here) and Coal Property Holdings, LLC v. C.I.R., Dkt. # 27778-16 (here)

Finally a brief note on a couple of designated orders that arose from conservation easement cases. I recall at one of the first tax conferences I ever attended in 2012, practitioners (focusing on tax planning, not controversy) crowing about conservation easements. Now, interestingly enough, these years later conservation easements are still a topic frequently being discussed in the tax world, though now mostly by litigators… usually a bad sign for the planners. 

Coal Property Holdings pretty well illustrates the general state of affairs, with the taxpayers now arguing only over whether they should get hit with a 40% penalty for gross valuation misstatement under IRC § 6662(h). Post-script: in the time since this order was issued, the Tax Court entered a stipulated decision (here) where the parties agreed to the 40% penalty, and reducing the charitable contribution from $155,558,162 (on the return) to a slightly-less-magnanimous $58,162. Ouch.

Designated Orders, June 15 – 19, 2020: Whistleblower Week! Part I of II

It was a fairly busy week at the Tax Court June 15, with seven designated orders of which three involved whistleblower actions. The lessons that can be gleaned from them go beyond just the whistleblower statute (IRC § 7623). They touch on two issues of increasing importance in non-deficiency cases: the administrative record and delays in the IRS reaching a “determination.” Let’s start by looking at the determination issue.

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Can A Writ of Mandamus Get You Into Tax Court? Whistleblower 3425-19W v. C.I.R., Dkt. # 3425-19W (here)

Usually, the “ticket” someone needs to get into Tax Court entails a “determination” by the IRS of some variety -for example a Notice of Deficiency (determining, believe it or not, a deficiency) or a Notice of Determination in a Collection Due Process case (which can determine any number of things, but usually whether to sustain a levy or lien). There are, however, some tickets to Tax Court that jump past requiring a determination from the IRS, particularly when the IRS has taken a while to conclusively respond.

One such ticket is Innocent Spouse relief with jurisdiction invoked under 6015(e)(1)(A)(I)(ii). Because of the Taxpayer First Act’s changes to the Tax Court’s scope of review (See IRC 6015(e)(7)(A)), there remain some unresolved issues for how the Court is supposed to review claims that come in without a determination being reached. PT has covered these issues here and here, among others.

This order raises a very interesting question about whether a Whistleblower action may also get into Tax Court without a determination being reached, albeit in a very different manner than the Innocent Spouse avenue. Unlike IRC § 6015, the Whistleblower statute does not expressly provide that the Tax Court has jurisdiction at a set point of time after filing a whistleblower claim. In fact, the statute could be read as saying that the Tax Court only has jurisdiction after a final determination is reached by the IRS (see IRC § 7623(b)(4)). “Whistleblower 3425-19W” had not received a determination by the time the petition was filed… easy “Dismiss for Lack of Jurisdiction” win by IRS, right?

Not quite.

In many instances, petitioners might not care that much about the IRS dragging their feet on reaching a determination. Almost uniformly if you have a chance of getting money from the government there is a limit on how long the IRS can delay reaching a decision before you have access to Court (this would be true, for example, in the aforementioned Innocent Spouse cases, but also in a claim for refund in federal court: see IRC § 6532(a)(1)). In collection actions the best you can really do is not owe since the Tax Court has held that it doesn’t have refund jurisdiction (see Greene-Thapedi v. Commissioner, 126 T.C. 1 (2006)), so there is (generally) less of an issue with the IRS failing to reach a timely determination.

But what about whistleblower actions? Whistleblowers want a cut of the proceeds they helped the IRS to collect: could the IRS just let the whistleblower claim languish forever, without reaching a determination of any variety -essentially a de facto denial of an award, but without court review? I have no idea how long it has been since “Whistleblower 3425-19W” made a claim for a whistleblower award, but let’s assume it has been years since the IRS has made a determination one way or another. What recourse does this individual have?

Creatively, perhaps, the individual in limbo can have the Tax Court order the IRS to reach a determination through a writ of mandamus. At least, that’s what Whistleblower 3425-19W is trying to do here. It isn’t clear (yet) if that will work out, for a number of reasons. Two that come to mind are (1) the general requirements for a writ of mandamus, and (2) the ever-looming metaphysical issue of exactly what jurisdictional limits are imposed on the Tax Court.

A refresher may be helpful for those that only dimly remember the phrase “writ of mandamus” from Marbury v. Madison. At its simplest, a writ of mandamus is a court order that (in this context) an agency take or refrain from taking a particular action. It isn’t something you see frequently in the tax context: it is an “extraordinary” remedy that has separation of power concerns written all over it. At least three threshold conditions must be met for a court to even considering issuing a writ of mandamus: (1) no other means to relief without the writ, (2) petitioner demonstrates clear and indisputable right to the writ, and (3) even when those two conditions are met, the Court has to think that a writ is appropriate under the given circumstances. See Cheney v. U.S. Dist. Court for D.C., 542 U.S. 367, 380 (2004)

This to my mind, these conditions rule out most Tax Court cases.

(As an aside, I have actually been counsel on a tax case in federal district court where the complaint sought a writ of mandamus. If nothing else, it appears to kick the DOJ into action. Our case settled favorably without ever getting anywhere even close to the merits.)   

But even if there is a good argument that a writ of mandamus would generally be appropriate, you run into a second issue if your forum is the Tax Court: does the Tax Court have the power to issue a writ for the matter at hand? The All Writs Act, (28 U.S.C. 1651(a)) is really short. Go ahead and read it for yourself. And it seems straightforward: when a Court needs to issue a writ, it can do so. The Act applies to (1) the Supreme Court, and (2) all Courts established by Acts of Congress (generally referred to as Article I Courts). The Tax Court is an Article I court, established by Congress, so one would think that solves the issue of whether the Tax Court can issue writs.

Here, however, we may have something of a Catch-22. The Tax Court (maybe) doesn’t have jurisdiction over the underlying Whistleblower action until a final determination is issued. So in this instance, unless there is some variety of quasi stand-alone jurisdiction under the All Writs Act, you (arguably) never could set foot in the door of the Tax Court to ask that they issue such a writ without the determination (that you are arguing should be issued) in the first place.

Judge Toro’s order is short (essentially a page) and is largely just asking for the parties to address this question by looking at the All Writs Act and, especially, Telecommunications Research and Action Center [TRAC] v. F.C.C., 750 F.2d. 70 (D.C. Cir. 1984).

TRAC appears to provide some guidance on this issue, though in a different and somewhat confusing context. TRAC involved the lack of a final order from the FCC. Apparently by statute the Court of Appeals has original jurisdiction over final orders from the FCC in these matters (see 28 U.S.C. 2342(1)). Without such a final order, did the Court of Appeals have jurisdiction to issue a writ (such writ producing a final order, and thus essentially enabling jurisdiction)? TRAC didn’t end up conclusively answering the question, because the Court never ended up having to issue a writ or deciding it didn’t have the power to: the FCC basically promised it would reach a determination sooner rather than later, and the Court kept things in a holding pattern until it happened.

However, TRAC did provide a wealth of analysis, replete with Supreme Court citations, on why it likely had jurisdiction to issue such a writ. Some of the key quotes from the TRAC decision that petitioners may want to consider include:

“Lack of finality [i.e. a final FCC order] however, does not automatically preclude our jurisdiction.” (Referencing Abbot Laboratories v. Gardner, 387 U.S. 136, 149-50, (1967) for the proposition that the finality doctrine should be flexibly applied).

And

“In other words, [the All Writs Act] empowers a federal court to issue writs of mandamus necessary to protect its prospective jurisdiction.” (In the context of an appellate court issuing writs in district court cases where appeal has not yet been perfected.)

Finally, TRAC also finds support for the proposition that it has jurisdiction to issue a writ of mandamus because the Court of Appeals has “exclusive” jurisdiction over these FCC final orders… which is arguably the same as the Tax Court in whistleblower actions.

The Tax Court has something of a reputation for taking a narrow view of its jurisdiction, and the jurisdictional barriers to entry. We’ll see if the whistleblower arena breaks some new ground.

Admin Record Issues: Vallee v. C.I.R., Dkt. # 13513-16W (here) and Doyle & Moynihan v. C.I.R., Dkt. # 4865-19W (here)

While Judge Toro’s order in Whistleblower 3425-19W was short but brought up a lot of questions, Vallee is long (20 pages) but likely not worth as much detailed analysis. However, it is worth mentioning for those who want to get a glimpse into the inner workings of the IRS, and how different areas of the IRS might collaborate on complicated cases. As a practitioner, Vallee may be helpful in determining what to ask for in discovery (or possibly a FOIA request), where particularity is important.

Vallee also highlights the importance of closely reading the IRS administrative record, noting potential inconsistencies, and putting them at issue (in this instance, mostly having to do with emails). In Vallee the petitioner’s close reading of the administrative record doesn’t ultimately lead to a winning case, only a delay of losing. Nevertheless it stands for the proposition that the need to keep good records can cut both ways in some tax contexts, and practitioners shouldn’t let the IRS off the hook when their records can be put at issue (see designated orders covered here).

Doyle & Moynihan provides another important practical lesson: how to actually raise the issue of the administrative record in motion practice. In Doyle & Moynihan, the petitioners think the IRS has omitted certain information from the administrative record that should be in it (from personal experience I know this can certainly happen). Petitioners try two different methods to bring this to the Tax Court’s attention: (1) a motion to strike the declaration of the IRS Whistleblower Officer certification, and (2) a request for a pretrial conference. Neither are (in this instance) the proper way to go.

The motion to strike (which Judge Gustafson characterizes as, in fact, a sur-reply to an IRS motion of summary judgment) fails because the correct approach is not to strike the IRS certification of the record, but to propose a supplement of the record with the allegedly missing material. So really, at this point, the motion isn’t asking the Court to do what you want it to do. And it isn’t time to ask the Court for what you actually want it to do either, because there is an outstanding summary judgment motion to be decided.

The second approach (a pretrial conference) also is shot down – though as a general rule Judge Gustafson appears to welcome the approach of requesting a pretrial conference. In this instance, however, the issues that petitioners want to raise in the pretrial conference go beyond the pleadings and the issues that the Tax Court is currently dealing with. Take it one day and one issue at a time (it is possible the case will/can be resolved without getting at the issues petitioner wants to discuss). Valuable advice we can all use right now…

Degrees of Compliance with Charitable Contribution Regulations, Designated Orders June 29 – July 3 and July 27 – 31, 2020

Three of the orders designated during the my (mostly) July weeks involved whether petitioners had met the requirements under two different charitable contribution deduction regulations. The answer depended upon whether the regulations at issue required strict compliance, or if substantial compliance was sufficient.  

One of the two regulations at issue is Treas. Reg. section 1.170A-14(g)(6), which has been a hot topic due the Court’s decisions in Coal Property Holdings, LLC and Oakbrook Land Holdings, LLC (opinion and memorandum) and the IRS’s ongoing efforts to settle similar cases, as announced in an August 31, 2020 news release here.

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The Oakbrook decisions were blogged about by Monte (here) and Les (here) with the focus on Administrative Procedure Act considerations related to the regulation’s validity. I won’t reiterate what they have already discussed, except to say that the Tax Court found the regulation was valid and applied it to disallow Oakbrook’s charitable contribution deduction.

Relying upon its reasoning in Oakbrook, the Court granted partial summary judgment for the IRS in orders in Docket No. 24201-15, Harris v. CIR (order here) and consolidated Docket Nos. 14433-17, 14434-17, and 14435-17, Habitat Investments, LLC, MM Bulldawg Manager, LLC, Tax Matters Partner, et al. v. CIR (order here). In both cases language in petitioners’ conservation easement deeds excluded the value of any post-gift improvements when determining the proportionate the amount the donee organization must receive in the event the easement is extinguished. The Court has held that Treas. Reg. section 1.170A-14(g)(6)(ii) requires strict compliance and such language violates the perpetuity requirement. See Kaufman I v. Commissioner. The regulation “imposes a technical requirement, it is a requirement intended to preserve the conservation purpose,” and petitioners must “strictly” follow the proportionality formula set forth in the regulation. See Carroll v. Commissioner.

The other charitable contribution regulation raised in my weeks’ worth of the designated orders is Treas. Reg. section 1.170A-13(c)(3). It was raised in consolidated Docket Nos. 28440-15 and 19604-16, WT Art Partnership LP, Lonicera, LLC, Tax Matters Partner, et al. v. CIR (order here) and the Court finds that substantial compliance with this regulation is sufficient.

The regulation lists the requirements for a “qualified appraisal,” which is required when a contribution of property is valued in excess of $500,000. Petitioner is a partnership that was formed in order to acquire 12 Chinese painting which were later donated to the New York Metropolitan Museum of Art (commonly known as “The Met”). Each of the donated paintings were valued at amounts between $6.23 and $26 million dollars. The IRS argues that the appraisals do not meet the requirements for a number of reasons, including because the auction company who performed the appraisal did not regularly perform appraisals for compensation and did not possess appraisal certifications or otherwise have the requisite background, experience or education.  

The Court previously addressed the qualified appraisal regulations in Bond v. Commissioner when the appraiser failed to include his qualifications with the appraisals. In Bond, the Court held petitioners were entitled to the charitable contribution deduction because the taxpayer did all that was reasonably possible while not perfectly complying with the requirements.

In the order, the Court holds that petitioner is not required to strictly comply with these regulations, but also notes that whether an appraiser is a qualified is a question of material fact which precludes summary judgment for the IRS.

Strict compliance and substantial compliance are both judicially created doctrines. Treas. Reg. section 1.170A-13(g)(6) and Treas. Reg. section 1.170A-14(c)(3) were both subject to notice and comment procedures, as is the case for most regulations. The language in both regulations also state that the requirements “must” or “shall” be met. This begs the question – how does the Court distinguish between regulations that require strict compliance and those that may not?

Strict compliance is required when the regulations relate “to the substance or essence of the statute” or are consistent with the statute as written. See Fred J. Sperapani v. Commissioner, 42 T.C. 308, 331 (1964) and Michaels v. Commissioner, 87 T.C. 1412, 1417 (1986).

On the other hand, the substantial compliance doctrine may be used to forgive “minor discrepancies” in the taxpayer’s reporting. See Costello v. CIR, T.C. Memo. 2015-87. It is permissible when the regulations are “directory and not mandatory” and “not of the essence of the thing to be done but are given with a view to the orderly conduct of business” See Bond and Dunavant v. Comissioner, 63 T.C. 316 (1974). In the world of charitable contribution regulations, substantial compliance has been permitted if the regulation is “only helpful to IRS in the processing and auditing of returns on which charitable deductions are claimed” and does “not relate to the substance or essence of whether or not a charitable contribution was actually made.” See Taylor v. Commissioner, 67 T.C. 1071 at 1078-1079 (1977).

Taxpayers (and practitioners) should not rely upon the idea that substantial compliance will be enough in any case as it is not liberally applied. When it is allowed, substantial compliance is permissible when a taxpayer shows reasonable efforts were made to follow the regulation.

Other orders designated, included:

  • Docket No. 498-19, Patrinicola v. CIR (order here): Petitioners received a notice informing them that their bank records had been subpoenaed, but they thought it was notifying them of forced collections and move to enjoin collection. There is no levy at issue, so the Court denies petitioners’ motion.
  • Docket No. 16605-18W and Docket No. 16947-18W, Kline v. CIR (order here): Petitioners move to vacate the Court’s decision with the mistaken understanding that it could not be appealed. The Court explains it can be appealed since it is not a small tax case and denies the motion.
  • Docket No. 15964-19, Swanson v. CIR (order here): Petitioner’s CDP case with an alleged section 6751(b) component is dismissed as moot, because Court’s jurisdiction is limited and the balance has been paid.
  • Docket No. 13309-19, Ishaq v. CIR (order here): IRS’s motion to dismiss is granted because the Court lacks jurisdiction since neither party can produce the notice of deficiency.
  • Docket No. 6345-14, Larkin v. CIR (order here): Petitioners’ motion for reconsideration for a case involving a foreign tax credit is denied.
  • Docket No. 1312-16L, Smith v. CIR (order here): A section 6751(b) case is remanded to appeals because it not clear whether an immediate supervisor signed off on the penalty.

A Family Court Spin on Whistleblowing, Supervisory Approval, and Trial Scheduling: Designated Orders 7/6/20 to 7/10/20

Even though there were only three orders for the week I monitored in July, there wound up being enough interesting topics to write about.  The longest order is interesting because it puts a different spin on whistleblower cases before the Tax Court.  The next case focuses on timely written supervisory approval for IRS penalties.  Finally, there is another case dealing with trial scheduling issues due to the COVID-19 pandemic.

A Nevada Whistleblower in Family Court

Docket No. 20287-18W, Monique Epperson v. C.I.R., Order and Decision available here.

Most often we think of whistleblower claims in a certain way.  It might be that the whistleblower was an employee who learned of misdeeds with regard to taxes or it might be that a person finds out through business dealings of foul play concerning tax reporting.  I doubt Family Court would be in the top answers concerning whistleblowing, but that is the topic of today’s case.

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You see, Ms. Epperson is a Nevada resident who was involved in a child custody dispute in her local family law court system in years 2016 and 2017.  Both her and her ex-husband were ordered to retain the services of various attorney, physician and psychology service providers from a list of court-approved outsource service providers.  She independently contracted with those providers and paid by cash, check or credit card during those 2 tax years.

It seems that Ms. Epperson had a bone to pick with how things went in family law court, but she was creative since most people do not think about the IRS when it comes to getting even.  Ms. Epperson is different because she chose to contact the IRS Whistleblower Office.  In December 2017, the IRS Whistleblower Office received five Forms 211, Application for Award for Original Information, from Ms. Epperson – all dated November 28, 2017.  The targets of those Forms were the Family Court and four independent contractors paid by her or her ex-husband during their court proceedings.

Her claim against the Family Court is that it should have issued Forms 1099-MISC to the various service providers because of the IRS requirement that when a business pays an independent contractor $600 or more over the course of a tax year, it should report those payments on a Form 1099-MISC issued to the independent contractor.  Her claim against the contractors is that they underreported income during the tax year, which would be easier to conceal in connection with child custody matters because they are usually sealed and unavailable for public viewing.

When the IRS Whistleblower Office reviewed the claims, they combined all five whistleblower claims into one group and applied a common decision.  The decision was based on the fact that the Family Court did not make payments to the independent contractors and the litigants (such as Ms. Epperson and her ex-husband) made the payments instead.  As none of those individual litigants are a business, they were not required to report payments by Form 1099-MISC.  The conclusion was there was no credible tax issue and the whistleblower claims were denied.

Ms. Epperson next timely filed her Tax Court petition.  Over time, the IRS filed a motion for summary judgment and Ms. Epperson filed her opposition to the motion, each with unsworn declarations under penalty of perjury in support of the motions.

This Tax Court filing comes about because Congress gave whistleblowers the ability to seek judicial review of their award determinations, but that review is limited to award determinations made under IRC section 7623(b), not 7623(a).  As a result, judicial review is only available for claims where the proceeds in dispute exceed $2,000,000 and an individual target taxpayer has gross income of at least $200,000 for the tax year(s) at issue. 

Ms. Epperson’s claim?  Unknown as to amounts paid to the Family Court, and, taken in the light most favorable to her, could have exceeded $2,000,000.  The claim against the contractors was fairly small (the $13,055 paid by her and her ex-husband to the contractors).  The contractors were three individuals and a corporation but nothing in the court pleadings or exhibits provides the gross income of those contractors.  Again, in the light most favorable to her, their gross income could have exceeded $200,000.  However, the proceeds in dispute for the contractors fell below the $2,000,000 threshold of IRC section 7623(b)(5)(B).

That threshold limitation is not jurisdictional, but it is an affirmative defense that must be raised and proven by the IRS.  In this case, the IRS did not raise that defense in their answer, but raised it in their motion for summary judgment.  An affirmative defense cannot be raised for the first time in a motion for summary judgment.  Since that defense was raised in the motion and not the answer, it will not be considered by the Court.  The fact that the contractor claims fell below the $2 million threshold was not fatal to Ms. Epperson’s petition for judicial review.

In reviewing the administrative record, there is explanation as to the determination regarding the Family Court but not explanation regarding the determination for the contractors.  The evidence indicates that there was a determination regarding the Family Court and the claims against the contractors were sent along in conjunction with that determination.  In the Court’s conclusion, there was no abuse of discretion regarding the Whistleblower Office determination regarding the Family Court but the IRS did not satisfy the burden of showing entitlement to summary judgment regarding the contractors.

The IRS motion for summary judgment with respect to the Family Court claim was granted while the motion for summary judgment with respect to the contractor claims was denied without prejudice.  The IRS Whistleblower Office determination with respect to the Family Court claim was sustained.

Supervisory Approval for IRS Penalties

Docket No. 15309-15, Jesus R. Oropeza, v. C.I.R., Order available here.

There are pending cross-motions for partial summary judgment in this case on the issue of whether the IRS secured timely written supervisory approval subject to IRC section 6751(b)(1) for the notice of deficiency.

In January 2015 – the revenue agent assigned to this case sent the petitioner a Letter 5153 and attached a revenue agent report asserting a 20% accuracy-related penalty attributable to one or more of the options under IRC section 6662(b)(1), (2), (3), or (6).  In the report, the agent stated that that the underpayment application is zero where a 40% penalty under 6662(h), (i), or (j) would be applied.  Two weeks later, the revenue agent’s immediate supervisor signed a civil penalty form approving a 20% penalty for substantial understatement [6662(b)(2)].  The penalty form did not cite any of the other three grounds or a 40% penalty.

In May 2015 – the revenue agent and someone who is potentially his immediate supervisor prepared a joint memo for IRS Chief Counsel.  The memo, signed by both, recommends the penalty be increased from 20% to 40% under 6662(i) on the ground that the petitioner engaged in a “nondisclosed noneconomic substance transaction.”  Five days later, the IRS issued a notice of deficiency asserting a 40% penalty for a “nondisclosed noneconomic substance transaction” but said it was a 40% 6662(b)(6) penalty.  In the alternative, the notice determined a 20% penalty attributable to negligence or substantial understatement of income tax.

The Court asks for the parties to submit briefs on the following issues by August 7: Assuming, for the purpose of argument, that the IRS did not secure timely supervisory approval for the penalty or penalties asserted in the revenue agent report –

  • Should the report be regarded as asserting all four types of 20% penalty, including the 20% penalty for engaging in a noneconomic substance transaction under section 6662(b)(6)?, and
  • If the 6662(b)(6) penalty was asserted in the report but not timely approved, can the IRS urge there was secured approval for a “40% section 6662(b)(6) penalty under 6662(i) even though the latter subsection operates only to increase the 6662(b)(6) penalty, which hypothetically was not timely approved?

I would make an argument in this case under the Taxpayer Bill of Rights about right # 10, the right to a fair and just tax system.  It seems to me there is a bit of a whipsaw effect going on here because of the quick movement between a 20% penalty and a 40% penalty.  First, the petitioner learns of a 20% penalty.  Later, the IRS stance is that it is a 40% penalty or, in the alternative, a 20% penalty.  Where is the finality for a taxpayer in those kind of changes?

Trial Scheduling Issues in the Pandemic

Docket No. 14546-15, 28751-15 (consolidated), YA Global Investments, LP f.k.a. Cornell Capital Partners, LP, et al. v. C.I.R., Order available here.

In November 2019, these consolidated cases were set for trial to commence September 14, 2020 in New York, New York.  Because of COVID-19 concerns, an order issued in April 2020 cancelled the Special Trial Session and struck the cases from the calendar.  The parties later agreed to have a Special Trial Session commencing Tuesday, October 13, by remote trial proceeding.  This order gives instructions regarding the trial and amends the pretrial schedule so that the pretrial schedule spans the end of July through the end of September 2020.

I did have a thought that maybe this was not meant to be a designated order.  Usually, all cases that are consolidated are listed in the daily designated orders.  In this case, there was only one of the two consolidated cases that were included in the designated orders.  I am not entirely convinced either way, though this case does lay out the pretrial schedule and addresses other concerns in the COVID-19 trial scheduling era so it may be useful reference.

 

A Walk Through the Life Cycle of Cases in Tax Court: Designated Orders, 5/18/2020 – 5/22/2020

There wasn’t much new ground broken in the designated orders the week of May 18, 2020. However, the four orders of the week did provide an interesting look at the progression of cases in Tax Court -from what is essentially the first motion a party is likely to file (dismissal for lack of jurisdiction) to the last (motion to revise decision), and a few in-between. Let’s take a look.

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Step One: Does the Court Have the Power to Even Consider This Case? Motion to Dismiss for Lack of Jurisdiction (Bang v. C.I.R., Dkt. No. 16550-19S (here))

In some ways, this conceptually may be considered step zero: the Court must consider if it even has the power to hear the case, and thus the power to take any other steps thereafter. Professor Bryan Camp has also described jurisdictional issues as a question of whether the parties can invoke the court’s power, and also speaks about the confusion that comes up with “jurisdictional” questions in a post on the Guralnik case here. But for present purposes we need not get into the real nuance of the concept of jurisdiction. Suffice it to say, if the Court doesn’t have jurisdiction it can do nothing but dismiss the case.

The actual motion to dismiss for lack of jurisdiction, however need not be (and sometimes isn’t) the first motion that a Court rules on. It can be raised at essentially any time. In fact, it could (theoretically) be raised well after a decision has been entered (more on that later).

In the Bang case, the IRS motion for dismissal came shortly (a little over a month) after the IRS filed its answer. And while many (probably most) Tax Court motions for dismissal for lack of jurisdiction usually arise on straightforward timing grounds (i.e. the petition is late), this particular case involves a bit of a twist. In this innocent spouse case, the IRS argues that the Tax Court lacks jurisdiction for two of the years at issue not because the petition was late, but because the petition was (in a sense) early: it was filed before the IRS ever issued a Notice of Determination for 2012 and 2013. Those familiar with the jurisdictional rules for innocent spouse cases can probably already see why this IRS motion is doomed to fail.

A Notice of Determination is extremely important, and especially so in Collection Due Process cases. Under IRC 6330(d), a “determination” by the IRS is the only ticket into Tax Court. Sometimes the Notice of Determination is erroneously labeled a “Decision Letter” when the IRS (wrongly) thinks it was engaged in an equivalent hearing, but in any event a determination is needed.

Not so with innocent spouse. With innocent spouse, if an individual submits a request for relief and the IRS takes more than six months to reach a determination they can petition the Tax Court without it. See IRC 6015(e)(1)(A)(i)(II). Because of the Taxpayer First Act, these pre-determination letter petitions raise some issues with the nature of Tax Court review (as covered previously here and here), but the jurisdictional question remains the same.

So the IRS is out of luck if their (only) argument is that there is no Tax Court jurisdiction in an innocent case because there is no determination letter. Does the IRS have any other arguments in this case?

Yes, they do, but it won’t help them on the motion at hand, even though it may be a winner later on. The IRS thinks two of the years are barred by res judicata. And that may be true. But the motion concerns jurisdiction, and as Judge Carluzzo notes, res judicata is an affirmative defense (see Rule 39) that does not operate to deny the Court’s jurisdiction.

Step Two: So the Court Can Hear Your Case, But Can It Give the Remedy You’re Asking For? Motion to Dismiss for Failure to State a Claim Upon Which Relief Can be Granted (Houston v. C.I.R., Dkt. # 9869-19W (here))

To beleaguer the analogy, sometimes your “ticket” to Tax Court might be valid but the purpose you’re trying to use it for isn’t. If I have a ticket to my niece’s 5th grade play, but when I enter the auditorium I say “now show me Hamilton,” the bewildered chaperones are likely to say “we can’t give you what you’re asking for.” Such is the case with the whistleblower in Houston.

We have talked before about what you will need to prevail in whistleblower cases under IRC 7623, most recently here. For present purposes, it will suffice to say that if the IRS (1) does not use your tip to pursue the party and (2) does not collect proceeds from the party based on the tip, your tip is essentially “worthless” for IRC 7623 award purposes. If you go into court with an IRC 7623 ticket, you should be prepared to raise allegations that match up with those two issues or you will probably be booted fairly quickly.

Here, the whistleblower does not really seem to care about either of those issues. In fact, the whistleblower appears to just want to re-air grievances against the target of their “tip,” which in this case happens to be a “small municipality” that has been “corrupted.” The main concern of the whistleblower appears to be less about unpaid taxes the whistleblower thinks are owed to the Treasury, but more about unpaid funds the municipality owes to the whistleblower. If this is the relief the whistleblower wants, and if the whistleblower has raised no other issues in their pleadings (even under the fairly broad reading of pleadings under Tax Court Rule 31(d)), it is pretty clearly not the sort of relief the Tax Court can grant. And so the case is dismissed.

Step Three: Does the Court Have What It Needs To Reach A Decision? Motion for Summary Judgment (Prosser v. C.I.R., Dkt. # 8954-19L (here))

Trials are all about fact finding. But there is a limited universe of facts that “matter” for any given case. Summary judgment, as we are frequently told, is intended to avoid lengthy and expensive trials where further fact finding is no longer necessary.

Oftentimes the parties can agree (more or less) on enough of the facts within that fact universe for a decision to be rendered as a matter of law. This can be the case even in tricky, seemingly fact-intensive valuation cases if the facts as agreed upon flow to a valuation as a matter of law. (See my post here.) Other times, the parties don’t agree on the facts but the facts they don’t agree on are “outside of the fact universe” at issue (i.e. immaterial). (See my post here.)

Still other times, the parties don’t agree on the facts that are within the relevant fact universe, but the nature of their disagreement doesn’t require a trial. The dispute about the facts isn’t “genuine” -that is, even viewing the facts in the light most favorable to the non-moving party, there isn’t really much of a dispute to be had. It may be best not to think of “genuine” in this context as akin to “good-faith.” Sometimes, it is simply a question of the record the Court has before it -particularly where there are denials of facts without affidavits or other supporting evidence. (See post here)

This case is the latter type, where the parties disagree on a material fact and the IRS wants to say that the dispute is not genuine. Those are generally the hardest summary judgment motions to win (remember, the non-moving party gets all inferences in their favor), and the IRS does not prevail in this case.

This is a Collection Due Process case where the petitioner wanted to raise the underlying tax in the hearing -an issue PT has covered in great detail (here and here among others). In this instance, the petitioner would have the right to raise the underlying liability only if they did not “actually receive” a letter from the IRS giving them the right to administrative appeal of a proposed IRC 6672 penalty. The IRS says “mailing records show we delivered that letter to you.” Petitioner says, “but I never actually received it.” Summary judgment motion (from IRS) ensues. And is denied. A material fact (maybe the material fact) is subject to a “genuine” dispute. Yes, there is a presumption that the Postal Service properly delivered the mail, but delivery isn’t enough: the individual has to receive the letter. Sometimes things happen that break the chain from mailbox to taxpayer’s hand… like children throwing the mail away. Not saying that is what happened in this case, but it has been grounds for finding a lack of actual receipt in the past. See Lepore v. C.I.R., T.C. Memo. 2013-135.

Although this is a fairly modest (two page order), I think it highlights some timely issues that are worth thinking about. As was written about by Keith here and has been discussed quite a bit in the tax community of late, the IRS mailing records are not always reliable. See, for example, post here. The decision of the IRS to intentionally send out letters with incorrect dates may be penny-wise, pound-foolish (or maybe just entirely foolish) exactly because of how important mailing dates are for so many aspects of tax procedure, and particularly for instances where the IRS wants a quick win on summary judgment or jurisdictional grounds. The IRS may be killing its own credibility, and thus undermining its ability to avoid trial by relying on its own records… increasingly such records appear to be subject to “genuine” dispute.

Step Four: The Case Is Over! But Is It Ever Really Over? Motion to Revise Decision (Dynamo Holdings v. C.I.R., Dkt. # 2685-11 (here))

This case’s docket number is from 2011. The Court entered a decision in the fall of 2018. For those keeping track and as a helpful reminder, we are presently in the summer of 2020. What could there possibly be left for the Court to do, almost two years after the decision?

Not much. And certainly not what the petitioners would like the court to do, which is essentially to raise an issue that wasn’t raised in the original litigation. Judge Buch is not having it.

The petitioner wants to argue that portfolio income was incorrectly characterized as “investment income” when it shouldn’t have been. And maybe they are completely right on the merits. But is it possible that they already had their chance to bring that up? As Judge Buch notes, the “parties filed briefs totaling over 1000 pages, exclusive of appendices. The phrase ‘portfolio income’ does not appear anywhere in those briefs.” Oh, just to pile on, the parties agreed on the decision for the Court to enter which included that characterization (indeed, it appears to be how petitioners characterized it on their own original return. It seems almost as if petitioners realized something much, much later that they missed….

But in the interest of fairness, and assuming the Court doesn’t have better things to do, could this issue be brought now under a Rule 162 motion? Note that the rule specifies that such a motion be made within 30 days after the decision “unless the Court shall otherwise permit.” Does that mean it is just an issue of Tax Court discretion on whether to grant such a (remarkably) late motion?

Not quite. There are limitations on the grounds which the Court can (or will?) allow a revision. Those grounds are (1) legal nullity because the court lacked jurisdiction to enter the decision in the first place (see Step One, above); (2) fraud on the Court; (3) clerical error, and (4) in some circuits, mutual mistake. Raising a new legal issue that you forgot does not fall into those grounds… So now we can (finally) end this case. For real.