Lazy Mid-Summer Tips and Traps: Designated Orders August 12 – 16, 2019

It was a fairly lax mid-August week at the United States Tax Court. There were only three (non-duplicative) designated orders issued. One was a common example of the taxpayer simply not giving the IRS anything to work with in a CDP hearing and won’t be discussed (found here). The other two, however, provide a few useful tips and traps of general application worth noting.

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What Time-Zone Determines Timely (Electronic) Filing? NCA Argyle LP, et. al. v. C.I.R., Dkt. # 3272-18 (order here)

One of the more interesting tidbits from this week’s designated orders was buried in a footnote. The order above mostly dealt with an objection to the IRS’s motion for a deposition that (petitioners felt) came way too late to be fair (i.e. one month before trial). But it isn’t the timing of IRS’s motion that is interesting, but the timing of the petitioner’s objection. 

When the IRS moved to compel depositions the Court ordered petitioners to file any response by August 14. I’m assuming this case involves big dollars, because petitioners are partnerships and LLCs represented by expensive law firms in California. Those law firms are probably very busy, with lawyers working very late hours. So they figured they’d electronically file their response on August 14th at 10:04 pm… Western time.

And why not? The “Practitioners’ Guide to Electronic Case Access and Filing” stated (but has since been changed as a result of this order) at page 42 that “A document is considered timely filed if it is electronically transmitted no later than 6:00 a.m. Eastern time on the day after the last day for filing.” [Emphasis added.] In other words, the petitioners had almost six more hours to get their response in, if you take the practitioner’s guide seriously.

Alas, in the hierarchy of legal authority the “Practitioner’s Guide” is a step below Tax Court Rule 22. That rule states (effective November 20, 2018) that “A paper will be considered timely filed if it is electronically filed at or before 11:59 p.m., eastern time, on the last day of the applicable period for filing.” [Emphasis added.] Petitioner’s response was filed 10:04 p.m. the day of the filing deadline… but only on western time. We live in an east coast dominated country (take it from a mid-westerner). In the time-zone that matters, the response was late by a solid hour and five minutes. 

As a side-bar, it is important that other courts have different rules than the Tax Court. For example, as discussed here one preliminary difference is that Federal District Court determines the effective date of a complaint based on receipt, and not when it is mailed. Second, other courts (including Federal District Courts not located in Washington D.C.) are unlikely to set a deadline of 11:59 Eastern Time. The Federal District Court for Minnesota provides that an electronic document is timely if submitted “prior to midnight on its due date.” See page 4 of the ECF User Guide here. Though a time-zone is not provided (which midnight are we talking about?) one would surmise the Central Time zone, since the next rule covering timely paper filing sets the deadline at 5:00 p.m. Central Time on the due date. These rules from the ECF User Guide comport with the Federal Rules of Civil Procedure, which provide that for calculating the “last day” you generally look to the time zone in the court you are filing with. See FRCP Rule 6(a)(4).

So, bringing it back to Tax Court, is the West Coast law firm response thrown out for being filed out of time? Judge Buch is not one to stand on such formalities, stating that “no one was prejudiced by the 65 minute delay” and allowing it to stand.

Nonetheless, while this slight timeliness issue does not end up causing any problem for the parties in this case, it is important to recognize how different it would be if the deadline at issue was “jurisdictional.” As both Carl and Keith have extensively written about, based on the Tax Court’s current interpretation of the law, Judge Buch’s hands would be tied: deprived of jurisdiction, he would also be deprived of the ability to excuse the timeliness issue (say, for lack of prejudice, or more likely equitable tolling).   

Who To Ask For Help: Tax Court Isn’t a One-Stop Shop. Crawford v. C.I.R., Dkt. # 4318-18L (order here)

We have previously seen that the Tax Court is reluctant to stand-in as a federal district court on FOIA issues (see post regarding Cross Refined Coal, LLC here) or dismiss a case where it is up to the bankruptcy court to amend the stay (see post regarding Betters v. C.I.R., here). In the above order we have a similar issue involving the enforcement of a federal district court injunction. 

Essentially, the petitioner in this case has received informal Tax Court assistance (that is, no entry of appearance under Rule 24) from someone the IRS doesn’t much care for. And likely for good reason: the individual assisting the petitioner is associated with the Williams Financial Network, currently under indictment for a $5 million fraud scheme. The IRS accordingly has enjoined all individuals associated with that entity from “representing people before the IRS.” Of course (or as sometimes needs to be explained to taxpayers), the Tax Court is not the IRS so those individuals are not (technically) prohibited from representing petitioners before the Tax Court if they otherwise meet the requirements of Rule 200

(As an aside to new tax court practitioners, don’t overly concern yourself with the reference to a “periodic registration fee” in the rules to practice. Once, in a fit of stress, I called the Tax Court to see if I was current on the fee (I couldn’t ever remember paying) and was told they hadn’t actually required it for decades.)

It isn’t clear if the individuals associated with the Williams Financial Network meet the requirements of Rule 200 (I’d bet they don’t), but that isn’t really the problem. The problem is that the IRS asks the Tax Court to essentially make up rules and exercise power it probably doesn’t have: that is, the IRS asks Judge Buch to order that the individuals helping the petitioner be prohibited from doing so when the case is remanded to IRS Appeals. Judge Buch declines to do so: the Tax Court wasn’t the court that issued the injunction, and the Tax Court has no rules on who can represent people before the IRS, just who can represent them before the Tax Court. 

In other words, if Williams Financial Network violates the district court injunction it’s not the Tax Court’s problem, and not their place (or power) to fix it. 

Innocent Spouse, Abuse of Discretion, and Remand: Designated Orders 8/5/19 to 8/9/19

My August week of designated orders brought four orders in different areas. The topic range includes innocent spouse (with the question of application under the Taxpayer First Act), collection due process and remands. One of the remands has an abuse of discretion issue.

Taxpayer First Act and Innocent Spouse
Docket No. 12498-16, Beverly Robinson v. C.I.R., Order available here.
In her first designated order, Judge Copeland brings up how the Taxpayer First Act affects a pending innocent spouse case. Carlton Smith blogged about this issue in Procedurally Taxing previously here. Carlton’s article discusses the implications of the Taxpayer First Act section concerning innocent spouse cases, specifically IRC section 6015(f) cases.

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This order concerns a case that already went to trial on February 5, 2018. The parties filed a joint stipulation of facts and a joint first supplemental stipulation of facts. The petitioner moved to admit Exhibit 58-P and it was admitted into evidence. Each party called witnesses in support of their arguments. The entire administrative record was not presented or received into evidence. The trial was before Judge Chiechi, who has since retired. The case was reassigned to Judge Copeland. After trial, on July 1, 2019, the Taxpayer First Act was signed into law. The relevant portion to this case is below.

Section 1203(a)(1) of the Taxpayer First Act of 2019 (TFA) amended IRC section 6015(e) to add a new paragraph (7):

(7) STANDARD AND SCOPE OF REVIEW. — Any review of a determination made under this section shall be reviewed de novo by the Tax Court and shall be based upon —
(A) the administrative record established at the time of the determination, and
(B) any additional newly discovered or previously unavailable evidence.

TFA section 1203(b) states those sections apply to “petitions or requests filed or pending on or after the date of the enactment of this Act.”

Judge Copeland issued this order, stating that the parties shall file a response to the order addressing the effect of sections 1203(a) and (b) of the TFA on this case.

At first, I thought the judge wanted the parties to do research on the TFA and how its innocent spouse provision applied in general to their case so I would have directed them to Carlton’s article. However, I reread the order and realized just what she meant concerning the TFA’s application to their case.

The case was pending on the date the TFA was enacted. Now, normally the Tax Court would review the innocent spouse determination de novo based upon (A) and (B) listed above. However, the administrative record was not introduced or received into evidence, which is part of subsection (A) above. What to do in this case? Let the parties make their arguments about the matter. Thus, the judge ordered the parties to submit their responses on or before September 4, 2019.

As a follow-up – on August 30, the IRS filed an unopposed motion for an extension of time. That motion was granted to give the IRS an extension of time to October 4.

Takeaway: Applying the Taxpayer First Act will open up several questions for years to come. Since the Taxpayer First Act specifically discusses Tax Court review of innocent spouse cases, this may be a prominent issue moving forward in designated orders. They should still read Carlton’s article.

More Innocent Spouse
Docket No. 10341-18, Jeffrey C. Elliott v. C.I.R., Order available here.
Pamela Elliott filed a motion for leave to file a notice of intervention in this innocent spouse case. Normally, she could have intervened as a matter of right. However, she filed the motion after the 60-day window during which she could intervene and requests leave to do so at this late time. Her reasoning is that “she was not represented by counsel and did not understand her procedural rights,” adding that the “interests of justice favor allowing her request.”

The Court reviews factors regarding Ms. Elliott’s motion for leave to file a notice of intervention. The first factor is the length of time she knew or should have known of her interest. Ms. Elliott waited a year so that factor weighs against her. The second factor is the prejudice the parties may suffer by her failure to intervene earlier. Mr. Elliott did not provide proof of additional fees he would suffer, the docket in this case has been inactive, and the parties have sufficient time to prepare for an October 2019 trial so it is determined that the parties will not suffer prejudice from her failure to intervene earlier so that factor weighed in her favor. The third factor is the prejudice she will suffer from a denial of her motion. Because she will be affected by the decision on innocent spouse relief, she would suffer prejudice by not being able to participate in the trial and that factor weighs in favor of granting the motion. The fourth and final factor is any unusual factors weighing in favor of finding timeliness. There are no issues affecting timeliness, but the parties are involved in another Tax Court proceeding (2957-19) involving similar issues. On balance, the factors allow for Ms. Elliott to be granted the relief she sought.

The Court grants her motion for leave to file a notice of intervention, ordering to amend the caption and serve her with the proper notice and pretrial order so she may prepare for trial.

Takeaway: It is not recommended to file documents after a deadline has passed. However, factors may allow for the Court to grant an individual the relief sought.

Abuse of Discretion for Installment Agreement Notice
Docket No. 2018-17L, Don R. Means v. C.I.R., Order here.
The petitioner is a retired airline pilot who claimed deductions based on participation in tax shelter programs. Audits of those schemes resulted in the IRS disallowing the deductions and deficiencies for 7 tax years. The Tax Court entered final judgments in 2013 regarding the aggregated assessed tax and associated accrued interest to be, respectively, $102,765 and $76,498. Mr. Means entered into a $500 monthly installment agreement in February 2014. The IRS terminated the agreement in May 2016. In July 2016, the IRS issued a Notice of Intent to Levy. Mr. Means filed a Form 12153 to request a Collection Due Process hearing. In the form and also by request to the settlement officer, Mr. Means requested an explanation of the termination of the installment agreement.

Termination of an installment agreement must be preceded by a 30-day notice that provides an explanation to the taxpayer. There were inconsistencies in the administrative record so it was unclear that the notice requirement under IRC section 6159(b)(5) was met or that such notice was provided to Mr. Means (though there is an indication that Mr. Means, his ex-wife, or both, failed to provide the IRS updated financial information, which led to the termination).

The Court cannot agree with the settlement officer’s determination that legal and administrative procedures were met. Therefore, the conclusion is that the determination sustaining the proposed levy was an abuse of discretion. The Court remands the case to Appeals for a supplemental hearing. On remand, if Mr. Means did not have proper notice, he should either be allowed to continue the installment agreement or receive the proper notice due, with the right to appeal.

Takeaway: Consistent procedure is necessary for the IRS so that a taxpayer receives proper due process. If the administrative record is inconsistent about notices, it is more likely for the Court to decide there was abuse of discretion.

Collection Due Process, Remand, and Summary Judgment
Docket No. 25904-16SL, Chinyere Egbe & Sheila Daniels Egbe v. C.I.R., Order and Decision available here.
To begin, petitioners received an IRS notice of deficiency for tax years 2012 and 2013. They did not petition the Tax Court based on that notice.

Next, the IRS issued to the petitioners a Final Notice of Intent to Levy and Notice of Your Right to Hearing for the 2013 tax year. The petitioners submitted a form 12153 to request a collection due process (CDP) hearing.

The settlement officer assigned to the case worked with the petitioners and their representative. The officer granted them an extension of time and did not receive any requested financial documents. However, he told their representative that they qualified for a streamlined installment agreement of $275 per month. The representative agreed to get back with the settlement officer after discussing with the petitioners. The petitioners made two payments before realizing the agreement was not in effect and then terminated their relationship with the representative because of not communicating acceptance of the installment agreement to the IRS.

The IRS issued a notice of determination to the petitioners not to grant relief from the proposed levy action. The petitioners filed a timely petition to the Tax Court concerning the notice of determination, also checking the box for a notice of determination concerning innocent spouse relief (which did not apply) and indicating the notice was for tax years 2012 and 2013 (when it was only for 2013).

The IRS filed a motion for summary judgment, which the Court denied. The Tax Court remanded the case to IRS Appeals for a further administrative hearing so the IRS could provide petitioners a supplemental CDP hearing. The Court dismissed tax year 2012 and the innocent spouse claim from the case.

The same settlement officer held a further CDP hearing. He informed the petitioners they could not challenge the liability for tax year 2013 because they received a valid notice of deficiency and that they had accrued an additional liability. The settlement officer proposed an increased installment agreement and they accepted, signing form 433D.

The IRS issued to the petitioners a supplemental notice of determination related to tax year 2013, determining that the proposed levy is not sustained because they agreed to a $600 per month installment agreement.

Following the supplemental notice of determination, both parties were to file status reports but only the IRS filed one. The Court scheduled the case for trial on the September 23, 2019, docket for New York, New York. The IRS filed a motion for summary judgment, with the settlement officer’s statement in support. The petitioners filed their objection to the motion for summary judgment.

In the Court’s analysis, the petitioners did not show there was a genuine issue for trial. Since the petitioners were in an installment agreement, the IRS did not sustain the proposed levy. The Court granted the motion for summary judgment because there was no genuine issue of material fact and removed the case from the September calendar.

Takeaway: To some degree, I think the petitioners had bad representation, but I think the biggest problem was a lack of understanding of IRS and Tax Court procedure. What are some indicators? They did not petition the Tax Court regarding the liabilities for 2012 and 2013 from the notice of deficiency. They (or their representative) did not respond or communicate with the settlement officer for the CDP hearing. They did not fill out their Tax Court petition correctly based on the original notice of determination.

I find that clients do not understand the difference between the various notices that provide them access to the Tax Court. Generally, the notice of deficiency allows them to contest the liability while a notice of determination concerning collection action is about abuse of discretion in a CDP hearing. It is critical to know what lane you are in to argue correctly and find success in the Tax Court.

A Tax Court Procedural Anomaly: the Trial Subpoena Duces Tecum, Designated Orders July 29 – August 2

Subpoenas, morphing motions and a protestor’s use of the Tax Court judgment finality rule were covered in orders issued during the week of July 29th. Judge Leyden also made sincere efforts to help petitioners help themselves and prevent dismissal of their case (here), and the petitioners heeded her advice.

Docket No. 19502-17, Cross Refined Coal, LLC, U.S.A. Refined Coal, LLC, Tax Matters Partner v. C.I.R. (order here)

This first order was not actually designated, but Bob Kamman raised it as one that perhaps should have been, because it involves a distinctive aspect of Tax Court procedure: the trial subpoena duces tecum.

Information and documents can (and should) be requested well in advance of trial but if they are not provided, then the mechanism available to the parties to demand the production of documents is with a trial subpoena duces tecum. Section 7456(a)(1) requires subpoenaed third parties to appear and produce discovery-related documents at the “designated place of hearing,” rather than some other location at another time as allowed by other Courts (see Fed. R. Civ. P. 45). The rule is in contrast with typical Tax Court procedures that encourage the parties to exchange information informally and as early as possible.

In this order, the petitioner moves to quash the trial subpoenas that the IRS served on six non-parties. Petitioner argues that the issuance of subpoenas is the IRS’s attempt to obtain discovery from petitioner in violation of Rule 70(a)(2), which requires that discovery between parties be completed no later than 45 days prior to the calendar call date. The Court disagrees that the rule applies because the subpoenas were served on non-parties, rather than the petitioner or another party in the case.

Petitioner’s issue with the subpoenas is the IRS’s timing. The subpoenas were served on the non-parties 25 to 21 days before the calendar call, and since the subpoenas order the non-parties appear at trial it means there may be very little time for the petitioner to review any newly produced documents.

A rule governing the timing for subpoenas does not seem to exist in the Code or Tax Court rules. The Tax Court’s website suggests that the subpoena form can be obtained from the trial clerk at the trial session (it is also available on the Tax Court’s website, here). There are some references to timing in the Internal Revenue Manual which instructs IRS employees that, “[t] he time for the issuance of necessary subpoenas will vary from case to case depending to a large extent upon the finalization of stipulations,” and “[t]o be effective in enforcing the attendance of the witness, a subpoena must be served on the witness a reasonable time in advance of its return date. A ‘reasonable time’ will vary from witness to witness depending upon the location of the residence of the witness and the place of trial and, in the case of a subpoena duces tecum, the nature of the documents and records called for by the subpoena.” I.R.M. 35.4.4.4.1.1

The Court points out that its standing pretrial order requires exhibits be exchanged before trial, but an exception to the requirement can be made if the documents are received from a third-party at the trial session, when the proffering party had no prior opportunity to receive and exchange them.

That being said, the Court is somewhat suspicious of the IRS’s timing in this case and states, “[i]f respondent’s use of the subpoenas in this case were to result in a large number of previously undisclosed documents being offered at trial, we would expect to inquire about whether the last-minute production of the documents was actually imposed on respondent through no fault of his own, or whether instead the subpoenas were a blameworthy last-minute attempt to obtain documents that he could have attempted to obtain in time to comply with the standing pretrial order.”

The Court also sympathizes with petitioner’s concerns, but believes they are premature – because it is not guaranteed that the third parties will submit documents nor that the IRS will offer any submitted documents into evidence. Petitioner will still have the option to object later if the information produced by the subpoenas results in prejudice.

The flip side of the subpoena issue involves the timing of their return.  Neither the IRS nor a taxpayer who issues a subpoena duces tecum has the ability to force the third party to provide the documents prior to calendar call.  While the IRS could have summoned the documents prior to issuing the notice of deficiency, once in Tax Court the summons procedure no longer applies.  It may be fair to fault the IRS for not using its summons power to obtain necessary third party information prior to issuing the notice but if the need for the third party documents does not become apparent until after the notice has gone out, the IRS has no way to force the third party to turn over the documents before calendar call.  This is not ideal for either party since neither party may know what the documents will provide.  Usually, a party issuing a subpoena duces tecum will try to get the recipient of the document to produce the documents before calendar call in order to avoid the problem of having to come down to court.  This informal process can circumvent the problems described here.  However, if the third party does not want to turn over the documents until calendar call, the party seeking the documents does not have easy tools in the Tax Court to force their hand prior to calendar call.

Docket Nos. 17038-18L & 17353-18L, The Diversified Group Incorporated, et al. v. C.I.R. (order here)

Next up is yet another section 6751(b)(1) case, in a consolidated docket, addressing the timeliness standard established in Clay, but this order also involves the application of a Tax Court rule that allows the Court to treat the petitioners’ motion for judgment on the pleadings as a motion for summary judgment. This is permissible when matters outside the pleadings are presented to the Court, and not excluded, which then allows the motion to be governed by Rule 121.

A judgment on the pleadings is appropriate when it is clear from the pleadings themselves that the case presents no genuine issues of fact and only issues of law. The basis for the judgment is limited to the pleadings and admissions already presented, so there is no option to present additional information.

A motion for summary judgment is appropriate when there are issues raised by the pleadings, but the issues are not genuine issues of material fact and the moving party is entitled to judgment as a matter of law. A motion for summary judgment can address matters outside of the pleadings and the parties are given a reasonable opportunity to present all information pertinent to the motion pursuant to Rule 121.

In this case, petitioners moved for a judgment on the pleadings because the IRS included proof that it had met the timeliness standard under Graev III in the pleadings, but the time frame established by the pleadings is too late under Clay. In response, however, the IRS presented (and the Court did not exclude) the declaration of the immediate supervisor of the revenue agent involved in the case, and exhibits showing that supervisory approval was obtained much earlier than the date on the Form 8278 included in the pleadings. The Court finds the IRS’s information sufficient to raise a genuine issue of material fact regarding when, and in what fashion, managerial approval was obtained. As a result, the Court denies the petitioners’ motion for summary judgment.

Docket No. 335-19, Jalees Muzikir v. C.I.R. (order here)

In this designated order, the IRS’s motion for judgment on the pleadings is granted. Petitioner had previously filed a “years petition” for the year at issue. According to a footnote in the order, “a ‘years petition’ does nothing other than allege that for a substantial number of consecutive taxable years the taxpayer did not receive any jurisdictionally-relevant IRS notice, such as a notice of deficiency or a notice of determination, that would permit an appeal to the Tax Court. A ‘years petition’ is the manifestation of protest from tax deniers and tax protestors.” The case petitioner instituted with the “years petition” was dismissed for lack of jurisdiction, but then he subsequently received a notice of deficiency for one of the years which is the year at issue in this order.

Petitioner argues that since the Court dismissed his initial case, the IRS doesn’t have jurisdiction over the year at issue now because of the Tax Court judgment finality rule under section 7481. The Court disagrees with this analysis and grants the IRS’s motion, because petitioner did not raise any issues other than the IRS’s lack of jurisdiction.

Whistleblower Jurisdiction: Is Anyone Listening? – Designated Orders: July 22 – 26, 2019

This week featured three orders from Judge Armen, along with another brief order from Judge Kerrigan that extended the time for responding to a discovery request.

These will be among the last orders from Judge Armen. The Tax Court recently announced that Judge Armen retired from the bench, effective August 31, 2019. I’ve appeared before Judge Armen numerous times for trial sessions in Chicago. In those sessions, I always found him to be fair, thorough, and thoughtful. He always took time to walk pro se petitioners through the Court’s procedures, carefully listened to them, and explained the applicable law in an approachable manner. His presence on the bench will, indeed, be missed.

His first order is relatively unremarkable, save the exacting detail that Judge Armen uses to walk a pro se taxpayer through a relative simple issue (unsurprising, given his similar willingness to do so at trial sessions). Petitioner had contended that including unemployment income in gross income is “cruel, short-sighted, and runs afoul any theory of economic success.” That may well be, but Judge Armen painstakingly runs through the Code to demonstrate that unemployment income is specifically included in gross income under § 85 (and is otherwise generally includable under § 61(a)).

The other two orders are in pro se Whistleblower cases. Both grant summary judgment to the government because there was no administrative or judicial action to collect unpaid tax or otherwise enforce the internal revenue laws. For the Tax Court to obtain jurisdiction under IRC § 7623(b)(4), the IRS must commence such an action.

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Docket No. 17586-18W, Hammash v. C.I.R. (Order Here)

Petitioner submitted a Form 211, Application for Award for Original Information, with the IRS Whistleblower office, alleging that a certain business underreported taxes, and that the Petitioner had previously reported the business to the “IRS in California”. (One wonders whether Petitioner means an IRS office in California, or the California Franchise Tax Board; my clients often refer to the Indiana Department of Revenue as the “Indiana IRS”.) But, there wasn’t any further explanation or supporting documentation of the alleged malfeasance.

According to Respondent’s exhibits, the Whistleblower Office denied an award and didn’t otherwise refer the case for further investigation. The Petitioner timely filed a petition; from a review of the docket, it seems he may been represented by a POA at the administrative level, as a motion to proceed anonymously was originally filed by someone not admitted to practice before the Tax Court. The Court struck it from the record soon thereafter.

In any case, the particulars don’t really matter here. The limited information provided in the Form 211 isn’t what dooms Petitioner’s case; rather, it’s that the IRS never initiated an administrative or judicial proceeding to collect tax from the allegedly delinquent taxpayer.

For the Tax Court, this is a jurisdictional requirement under IRC § 7623(b)(4). The Tax Court is authorized to review a “determination regarding an award under [§ 7623(b)(1)-(3)]. IRC § 7623(a)(1), (2), and (3) provide for various awards. Paragraph (1) authorizes an award “[i]f the Secretary proceeds with any administrative or judicial action” related to detecting underpayments of tax or detecting and bringing to trial and punishment criminal tax violators. See IRC § 7623(a), (b)(1); see also Cohen v. Commissioner,139 T.C. 299, 302 (2012). Paragraph (2) and (3) awards are likewise premised upon an “action described in paragraph (1)”. Moreover, the government must collect some unpaid tax from the target taxpayer pursuant to such action, for the Tax Court to obtain jurisdiction.  

Neither an investigative action nor collection of proceeds occurred here. Petitioner didn’t provide any evidence to the contrary in the Tax Court proceeding; indeed, after the Tax Court struck his representative’s motion to proceed anonymously, he seemed to not participate at all. Therefore, summary judgment was appropriate and the Court sustained Respondent’s whistleblower determination.

Docket  No. 19512-18W, Elliott v. C.I.R. (Order Here)

This whistleblower claim contained substantially more detail than Hammash, but nevertheless Petitioner finds herself in the same situation.

Petitioner filed a Form 211, which according to the Court, alleged “a brokerage services firm . . . that was custodian for a certain qualified retirement plan was mishandling former plan participants’ accounts.” Unlike in Hammash, where it appears no outside review occurred, here the Whistleblower Office did forward the claim to a Revenue Agent at the IRS Tax Exempt and Government Entities division. The RA sent the claim back to the Whistleblower Office, noting that TEGE does not investigate custodians, but rather investigates qualified plans themselves.

The Whistleblower Office didn’t send the claim on to any other division of the IRS. Instead, it issued a denial letter essentially identical to the one in Hammash, noting that the information provided was speculative, lacked credibility, and/or lacked specificity.

Petitioner argued that her information was, in fact, credible and specific, and asked the Court to compel Respondent to investigate the claim.

While this case involved a much more engaged Petitioner with facially troubling allegations, one fact remains: it’s undisputed that the IRS did not conduct an administrative or judicial action to recoup any unpaid tax or otherwise prosecute violations of the internal revenue laws. No proceeds were collected either. Further, the Court cannot, under the limited jurisdiction provided in IRC § 7623, determine the proper tax liability of the target taxpayer or require the IRS to initiate an investigation. See Cooper v. Commissioner, 136 T.C. 597, 600 (2011).

Thus, the Court granted Respondent’s motion for summary judgment and sustained Respondent’s administrative denial of the whistleblower award claim.

One small nitpick: here and in Hammash, the Court determined that it lacked jurisdiction. Yet it “sustained” Respondent’s administrative determination. While it arrives at the same conclusion, I don’t believe that’s the proper result under Cohen or Cooper. Under those cases, the Court lacks the power to sustain or overturn the determination to deny the claim; it should therefore dismiss the case for lack of jurisdiction, rather than sustaining Respondent’s determination.

Sticker Shock and Settling on the Issues: Designated Orders, July 15 – 19

There were five designated orders for the week of July 15, three of which were perfunctory decisions in collection due process cases where the petitioner “filed and forgot” -in other words, after filing the petition, the taxpayer stopped doing much of anything to advance their case or respond to court orders. For the curious, those orders are here, here, and here. The remaining two orders appealed to my dual professional obligations: lessons in working with clients and teaching tax law. We’ll begin with one of the messy issues that arise in working with clients in tax controversy: backing out of settlement.

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Stipulated Issues and Sticker Shock: Kirshenbaum v. C.I.R., Dkt. # 10135-17S (order here)

The parties in this case have agreed on virtually everything, and even signed a stipulated settlement… and yet now the Kirshenbaums are having second thoughts. Why might that be? When the (fairly simple) issues are settled, the amount of tax that results is almost entirely a matter of math. My bet is that the Kirshenbaum’s had second thoughts when the numbers flowing from the stipulated words began to coalesce. A sticker-shock on the tax that would be due… and a sudden (futile) desire to renege. As an attorney, it demonstrates the two different languages you have to speak in settling tax matters: dollars and cents to the client, issues and law to the IRS. The last thing you want is the client backing out of settlement, wanting to argue issues with little merit, because they now realize that the merits mean they will owe more than they’d like.

The Kirshenbaum’s situation demonstrate how quickly taxes and penalties can cascade when there are errors on the return, and the return was late filed. To begin with, for late filers the “failure to file” penalty (IRC 6651(a)(1)) is a much quicker way to increase your bill than just filing on time without paying: the penalty accrues at a 5% monthly rate (to a maximum of 25%) rather than the 0.5% rate for failing to pay. Further, the amount of tax that the failure to file penalty is multiplied against is the amount “required to be shown on the return” (i.e. not necessarily the amount you actually report), so a later audit can retroactively bump up your penalty quite a bit. 

There is really no benefit I can think of to filing late, even if you are going to get late payment penalties. Perhaps the Kirshenbaum’s had a legitimate reason for filing late (though to get out of the penalties for “reasonable cause,” you generally need a really good reason, and demonstrate that you exercised “ordinary business care and prudence.” See Boyle v. C.I.R., 469 U.S. 241 (1985) and Les’s post on issues in the e-file age).

In any event, the Kirshenbaum’s return was both filed late and filled with easily detectable errors. The first easily detected error was a matter of calculation: the amount of taxable social security they reported (note that this wasn’t an instance of omitting social security income, but listing an amount received, and a corresponding “taxable” amount that doesn’t add up). That error was (presumably) fixed through IRC 6213(b)(1) “math error” authority. But then, on second (likely automated) look, the IRS also noticed that the return completely omitted roughly $38,006 of retirement distributions. A notice of deficiency was issued showing the increased tax, as well as increased failure to file penalty, along with an IRC 6662(a) penalty for good measure. That added up to a bill likely over $12,000, which the Kirshenbaums were not going to take lying down.

And their fight may actually have saved them some money, but only with regards to the IRC 6662 penalty. The other issues were largely foregone conclusions: if the additional retirement distribution was received and omitted by the Kirshenbaums, there would be additional tax due on it, as well as an increase in their taxable social security benefits simply as a matter of cold math. Since it was fairly clear that the additional retirement distributions were received (and taxable), the IRS and the Kirshenbaums were able to stipulate all of the issues, with the IRS conceding the IRC 6662 penalty (perhaps in good faith, perhaps because of a procedural infirmity). The Kirshenbaums signed the stipulation of settlement, thus avoiding the need to appear at calendar. All that remained was the decision document with a calculation of the deficiency (per Rule 155).

But when that calculation was done, the Kirshenbaums wanted to backtrack and argue the very issues they had stipulated to. The Tax Court was not having it: “They entered into an agreement, and we will hold them to their word.” Further, as Judge Gustafson alludes, there doesn’t really appear to be a “serious dispute to maintain about the matters[.]” The Kirshenbaums are grasping, agreeing that they received the retirement proceeds but picking fairly arbitrary amounts to treat as taxable. The Court isn’t going to play that game, especially after you fail to show up at trial after agreeing to all the issues. 

The most “difficult” clients I have are the ones that agree to the issues but want me to try to get the IRS to knock a few more dollars off the deficiency purely as a matter of negotiation. When the merits aren’t clear and there are hazards of litigation, there can be some wiggle room (see IRM 35.5.2.4). But where the correct outcome is clear there is really no “art of the deal” magic that can be done. This reality, I think, cuts against the popular conception of what lawyers do in back-room negotiations. At its worst, it can lead to clients wanting to back out of settlement when the issues are clear, as they were in the Kirshenbaum’s case. For an interesting and more detailed look at when settlement becomes binding, including when the IRS unexpectedly backs out, I highly recommend Keith’s piece here.

Bench Opinions, Substantive Law, and Innocent Spouse: Mayer v. C.I.R., Dkt. # 23397-17S (order here)

The crew at Procedurally Taxing have blogged about the value and nuances of S-cases and bench opinions before: here, here, and here. Keith has also written about bench opinions in more detail here. In the above order we have a bench opinion on an innocent spouse case that presents some interesting, though clearly not precedential, substantive application of IRC 6015(b) and (c). Because bench opinions are non-precedential (and not reviewed), the Judges sometimes appear more willing to bite on general equity concerns (even if they don’t present their opinions with that explicit rationale). To me, this opinion had some hints of that, and possibly even gets the law itself a bit wrong. 

The relevant facts can be boiled down to the following: husband (the requesting “innocent” spouse, in this case) and wife want to buy a house. To pay for it, they have to rely on their 401(k)s. Husband decides to borrow against the 401(k), whereas wife just takes a straight withdrawal. Wife pretty much controls the finances, including preparing the tax returns. When it comes time to file, wife omits the 401(k) withdrawal. Husband “paid little or no attention to the return” and signs it. The legal question at issue seems pretty straightforward: did the husband have “reason to know” of the understatement of tax by omitting the 401(k) withdrawal? He clearly knew she received money (i.e. knew of the transaction): is that enough for him to have “reason to know” of the understatement?

Judge Buch says “no, the husband did not have reason to know” because he was “not aware that there was an understatement,” since he did not really pay attention to the return when he signed it. Judge Buch also finds the other elements of IRC 6015(b) are met, including equity concerns, because “there is no indication that [the husband] benefitted in any way from [the 401(k) withdrawal].” 

I question both of those conclusions, but my bigger issue (as I’ll get to) is the legal reasoning applied to IRC 6015(c). For now, I’d say that I find it curious that in this case the husband appears to benefit from “paying little or no attention to the return” rather than asking reasonable questions… like whether his wife borrowed or withdrew the money he knows she took from her 401(k). See Treas. Reg. 1.6015-2(c). Similarly, I find it a bit charitable to say that he did not benefit from the withdrawal, when it went towards the purchase of their marital home. But perhaps there were other facts I am unaware of (including what happened to the home after the fact) that could better lead to those conclusions. 

Still, while there may be additional facts not referenced in the opinion that led to the decision (and the intervening ex-wife may also not have advanced her case well), the application of the law under IRC 6015(c) was a bit more troublesome to me. Generally, IRC 6015(c) relief is easier to get than relief under IRC 6015(b), because under (b) the requesting spouse can’t have “reason to know” of the understatement, whereas under (c) the requesting spouse can’t have “actual knowledge” of the item giving rise to the deficiency. The IRS bears the burden of proof in showing “actual knowledge” of the requesting spouse, which only makes the relief that much easier to come by. 

Judge Buch finds no “actual knowledge” of the item leading to the deficiency in this case because, again, the husband “was not aware that [his wife] took a premature distribution [rather than a loan] from a retirement account.” But is the fact the husband didn’t know (without asking) whether it was a loan and not a taxable distribution relevant, if he clearly knew that she received the money leading to the deficiency? And that is where I believe there was an error in the legal analysis.

Quoting King v. C.I.R., 116 T.C. 198 (2001), Judge Buch describes actual knowledge as “actual knowledge of the factual circumstances which made the item unallowable as a deduction.” He also directs readers to Treas. Reg. 1.6015-3(c)(2)(B) to further bolster the proposition. 

And Judge Buch is correct, as far as deductions go. But the “erroneous item” in this case is not a deduction: it is an omission of income. In fact, one paragraph above the treasury regulation cited to is a completely different standard for omitted income: “knowledge of the item includes knowledge of the receipt of income.” Treas. Reg. 1.6015-3(c)(2)(A). Both King and the regulation cited appear inapposite. In fact, much of King is spent discussing another precedential Tax Court case, Cheshire v. C.I.R, 115 T.C. 183 (2000) that expressly found you don’t need to know the tax consequences of an omitted retirement distribution to have “actual knowledge” of the item. Cheshire seems close to being on all-fours with the husband’s matter. King expressly reaches a different conclusion for actual knowledge of deductions, while preserving Cheshire’s actual knowledge of omitted income inquiry. 

Conceptually, I think there is a pretty good reason to hold taxpayers to a higher standard in relief from omissions of income than improperly taken deductions. I would say this is in part because income is presumably taxable, whereas deductions, as we are frequently told, are matters of legislative grace. In other words, you don’t have to be a tax expert to suspect that income should be on a return, whereas you do have to be closer to an expert to know if most deductions are really allowable.

To me, the innocent spouse husband got a far better deal than he would have if this were not a bench opinion. Apart from not being reviewed by other judges, bench opinions are given without the benefit of briefing from the parties (apart from, perhaps, pre-trial memoranda, which are generally optional in S-Cases like this one). I’d hope that IRS counsel would have hammered home on the distinction between omitted income and erroneous deductions if this were briefed. I am generally a fan of bench opinions when it involves simple questions of fact (and have been on the receiving end of a favorable Buch bench opinion in the past.)

I tell my tax procedure students that innocent spouse is about as far from typical tax law as you can get -that it usually involves equity and factual determinations far more than most other provisions in the Code. It is also fairly convoluted, as a matter of statute and regulation, because “innocent spouse” comes in three flavors. This bench opinion, perhaps, illustrates how easy it is to get tripped up on all the flavors and permutations even as a tax law expert. 

Application of IRC 6015, and particularly equitable relief under IRC 6015(f) is still being developed by the courts (and in some ways, by Congress in the Taxpayer First Act (see post here)). I believe the Court should have found “actual knowledge” from the requesting spouse in the above order, thus ruling out IRC 6015(c) relief. Since “actual knowledge” would necessarily meet the IRC 6015(b) “reason to know” standard, one would think that the only remaining avenue for relief would be “equitable relief” under IRC 6015(f) (Judge Buch found that the taxpayer was eligible for both (b) and (c), which both rules out and makes unnecessary relief under IRC 6015(f)). However, as noted in a previous post, the Tax Court appears to have taken a position that effectively makes “actual knowledge” a trump card, or at least far too heavily weighted as a factor, that may even preclude relief under IRC 6015(f). Keith and Carl have been working with that issue (the interplay of actual knowledge and equitable relief) in a case that is presently before the 7th Circuit. I naively hope that a decision is reached before I teach my class on innocent spouse relief this fall.

Abuse of Discretion, Tax Protesters Penalized, and More: Designated Orders 7/8/19 to 7/12/19

This week of designated orders consisted of five orders on a variety of topics. One of them Keith Fogg already discussed so I will not focus on that case in depth. The other cases focus on abuse of discretion in a collection due process case, tax protesters being penalized, a whistleblower petitioner’s choice, and a ruling on requests for production of documents.

Docket No. 25751-15L, Joseph Thomas Lander & Kimberly W. Lander v. C.I.R., Order available here.
Keith Fogg wrote about this case’s proposed order here. I just want to add that I do not think the results seem very fair. The petitioners did not receive notice of their tax liability because the notices of deficiency were not sent to their address. Still, that counts against them. Also, the petitioners are unable to challenge the underlying tax liability because a postassessment conference with Appeals counts as an opportunity to dispute the liability. While the law is against them on these issues, the convoluted history of their tax proceedings combines to look like the petitioners are not receiving fair treatment.
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Abuse of Discretion for Collection Alternatives
Docket No. 17999-18SL, Milton W. Asher, Jr. v. C.I.R., Order available here.
Mr. Asher has tax liabilities for 2013 and 2014. Following a notice of intent to levy, he filed for a collection due process hearing. After receiving the hearing’s results, he petitioned the Tax Court. The IRS filed a motion for summary judgment and Mr. Asher filed his response to the IRS motion.
First, the Court looks at the history of the administrative hearing for collection due process. There, the settlement officer wanted Mr. Asher to file his 2017 tax return and show proof that estimated tax payments were paid in full for 2018. The officer also stated that past due estimated payments could be part of an installment agreement, but would not be acceptable for an offer in compromise.
Mr. Asher and his counsel did not submit any proof of checks regarding payments being improperly applied by the IRS or for an abatement of penalties.
In looking at the 2017 tax return, Mr. Asher had filed an extension and ultimately filed the tax return 2 months before the October 15 deadline. The estimated payments resulted in an overpayment that the IRS applied to reduce his 2014 liability.
For the 2018 tax return, there were three estimated tax payments made that resulted in a credit balance.
Beginning the Court’s analysis, Mr. Asher did not submit proof regarding the payments being improperly applied or abatement of penalties so those issues were barred in the Tax Court case.
However, Mr. Asher was in filing compliance for 2017 since the tax return was under extension and Mr. Asher filed the return 2 months before the October 15 deadline. Also, at the time of the hearing Mr. Asher only had one estimated tax payment in arrears. In fact, due to the variable nature of his income, it is not clear an estimated tax payment was due on April 15, 2018. The Court states it was an abuse of discretion for the settlement officer to limit his access to collection alternatives when he was compliant regarding the 2017 and 2018 tax years.
The Court granted the IRS motion for summary judgment with regard to the existence and amount of the liabilities for the 2 tax years in question, specifically additional tax penalties, the ability to raise issues regarding alleged payments made for the 2 tax years, or raise any further issues beyond what is next described.
The Court denied the IRS motion for summary judgment to allow collection alternatives for Mr. Asher. He may be allowed either an offer in compromise (based solely on inability to pay, not doubt as to liability) or an installment agreement.
The Court says the parties may wish to consider whether to move for a remand so that a different settlement officer is assigned to Mr. Asher regarding those listed collection alternatives.
Takeaway: Here is an example of an abuse of discretion in a collection due process case, though the scope is quite limited. The settlement officer’s limiting of the collection alternatives was misdirected so Mr. Asher gets to look into an offer in compromise or installment agreement.

Tax Protesters Penalized
Docket No. 11368-18L, William Michael Calpino, Jr. & Kelly Jo Calpino v. C.I.R., Order and Decision available here.
The petitioners had 3 previous Tax Court cases. Each time, the petitioners made tax protester arguments. The first time, the Court imposed a $1,000 penalty under section 6673. In the other two cases, the Court denied the IRS motion for sanctions but warned the petitioners that the Court has the ability to impose a penalty that does not exceed $25,000 under section 6673(a)(1) for making similar arguments.
Following the deficiencies in those two Tax Court cases, the IRS mailed to petitioners the final notices of intent to levy and their ability to request a Collection Due Process hearing. The petitioners requested such a hearing. They did not propose collection alternatives, but made further tax protester arguments.
When the settlement officer tried to schedule a phone conference, requested financial information for a collection alternative, and requested that the petitioners file their 2015 tax return, the response was a letter refusing to provide financial information and making further frivolous arguments.
From the notice of determination, the petitioners filed the current case with the Tax Court with (guess what?) more tax protester arguments. They also filed a frivolous motion to dismiss for lack of jurisdiction and motion for summary judgment similar to those denied in their first Tax Court case that led to the $1,000 penalty.
The IRS had filed a motion for summary judgment, motion to permit levy and motion to impose a penalty. The Tax Court granted all 3 motions. Based on the history for the petitioners with the Tax Court (such as making frivolous arguments when warned not to do so), the Court imposed the maximum penalty of $25,000.
Takeaway: The Tax Court only has so much patience with tax protesters and arguments the IRS terms as frivolous (for some interesting reading from the IRS on frivolous tax arguments, look here). The deficiencies at issue were about $16,000 for 2012 and 2013. I think it is ironic that making those arguments gained them no ground and more than doubled their liability for those years based on that maximum penalty they received.

Whistleblower Petitioner’s Choice
Docket No. 23105-18W, Jaroslaw Janusz Waszczuk v. C.I.R., Order available here.
The IRS filed a motion for protective order in a whistleblower case that the Tax Court assures is substantively identical to other protective orders filed in other whistleblower cases.
The Court is trying to inform petitioner about the commonality of the IRS motion because the petitioner filed a 136-page opposition to the IRS motion, stating it is “frivolous, meritless, and groundless”. Petitioner’s argument is that granting the motion would interfere with his current litigation in California courts or complaints with various state and federal law enforcement agencies. The Court suggests that the petitioner is using the whistleblower proceeding as collateral to and useful to unearth material for use in the other litigation and complaints.
The Court spells out plainly that the petitioner can either choose to withdraw his opposition to the motion or not withdraw the opposition, which will be denied. In choosing to withdraw his opposition, the petitioner will also have to certify that he will abide by court order prohibiting him from using the information furnished to him by the IRS outside the whistleblower case or face criminal felony punishment. The petitioner is assured that without the disclosure of the section 6103 information to him as a whistleblower, his whistleblower claim for reward shows little chance of success (though it is not a guarantee of success, either).
The Court goes on to say a lengthy response is not required and would be inappropriate. If that is what the petitioner does, it will be treated as unwillingness to withdraw the opposition. If petitioner tries to condition, qualify, or limit the withdrawal and compliance, that will also be treated as unwillingness to withdraw the opposition.
Takeaway: Hmm. Do what the judge says and withdraw the opposition or likely lose the case. Seems like an easy choice to me – pick # 1!

Privileges and Waivers
Docket Nos. 20940-16 and 20941-16 (consolidated), Tribune Media Company f.k.a. Tribune Company & Affiliates, et al., v. C.I.R., Order available here.
These cases have gone through several rounds of motions and are in the discovery phase before trial. This current order concerns IRS requests for production of documents. Tribune argued that the scope of one request should be limited and that everything has been produced for the second.
Regarding the discovery arguments, the Court discusses the limitations of relevancy and privileged information relating to the IRS requests. Specifically, Tribune objects to the production of documents in the first request based on the attorney-client privilege, the work product doctrine and the tax practitioner privilege under section 7525. However, those privileges were waived.
The Court reviews the scope of the waiver and generally sides with Tribune. For the first request, the Court agrees with 2 of the 3 limitations that Tribune asks for. On the second request, the Court takes Tribune at their word that they have complied with the document request.
Takeaway: If you are interested in learning more about privilege and waiver in discovery, reading this order would shed more light on that subject.

Things That Happen to Your Tax Court Case When You File Bankruptcy or Your Judge Retires: Designated Orders, June 17 – 21

There were six designated orders for the week of June 17 – 21, of which three are worth going into detail on. The remaining three orders can be found here, here, and here. The orders that will be addressed raise some interesting issues with the interplay of bankruptcy and collection due process cases, as well as what happens when the judge that heard your case retires before rendering a decision.

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Does Dismissing a Collection Due Process Case Violate the Automatic Stay of Bankruptcy? Betters v. C.I.R., Docket # 8386-17L (here)

One of the most powerful provisions in the bankruptcy code is the automatic stay at 11 U.S.C. 362. Violating the stay can lead to claims (whether successful or not) of damages and attorney’s fees against the IRS (as Keith blogged here). The automatic stay essentially gives whomever files bankruptcy some “breathing room” from creditors while sorting things out by pausing (or preventing) most collection actions (see Keith’s post on the effect of the automatic stay and a notice of federal tax lien, here). One specific thing that the automatic stay touches is “the commencement or continuation of a proceeding before the United States Tax Court […] concerning the tax liability of a debtor who is an individual for a taxable period ending before the date of the order of relief” through the bankruptcy court. See 11 U.S.C. 362(a)(8). 

In the order above, the taxpayer filed his Tax Court petition in response to a Collection Due Process determination (that presumably would have upheld a levy action). People who have unpaid taxes frequently have other unpaid debts, and a few years later while the case was still pending in Tax Court the taxpayer filed a petition with the U.S. Bankruptcy Court. Now the taxpayer wants to get out of Tax Court and just deal with the whole thing in Bankruptcy Court. And the IRS has no objection to going that route.

The question is whether the Tax Court can dismiss the case without violating the stay, even if both parties want that result. The answer, according to Chief Special Trial Judge Carluzzo, hinges on the application of Settles v. C.I.R., 138 T.C. 372 (2012). Both the IRS and the petitioner say that Settles applies, such that the case can be dismissed. Judge Carluzzo, however, disagrees.

In Settles, the taxpayer had a collection case he wanted dismissed, while he had a bankruptcy case with a stay still in effect. The Tax Court allowed the voluntary dismissal of the case. The one (big) difference: in Settles the bankruptcy court had already adjudicated the merits of the tax liabilities, and all that was left were non-tax creditors. And that difference is enough for Judge Carluzzo to say that no voluntary dismissal is presently allowed: if you want to dismiss the case, take it up with the bankruptcy court to have them modify the stay.  

So even though the parties want it dismissed, Judge Carluzzo’s hands are tied. I’d note in passing that if the case were a deficiency proceeding, and not a collection action, the option of voluntary dismissal would be more obviously unavailing: once you invoke the Tax Court’s jurisdiction in a deficiency case there is no way out absent a determination by the Tax Court. Compare Estate of Ming v. Commissioner, 62 T.C. 519 (1974) with Wagner v. Commissioner, 118 T.C. 330 (2012).

The other order that involved bankruptcy (Wilson v. C.I.R., dkt. # 25218-18SL (order here)) deserves much less explication, but serves as a warning for taxpayers that think bankruptcy is a cure-all for tax debts. It is another collection action where the petitioners filed bankruptcy involving the tax years at issue, but in this instance the bankruptcy case was over well before the Tax Court order was issued. However, because the tax debts at issue were for returns that were due within three years of the bankruptcy petition they were non-dischargeable in Chapter 7 (see 11 USC 523(a)(1)(A) and 11 USC 507(a)(8)). The Bankruptcy court puts things in plain English for the taxpayer in their “Explanation of Discharge,” which included the sentence “Examples of debts that are not discharged are […] debts for most taxes.” Because one of the two arguments the petitioners want to make is that the debts were discharged in bankruptcy, and because the other argument has already been fixed by the IRS (applying a payment to the correct year) there is nothing left at issue. Summary judgment ensues.

What Happens When the Tax Court Judge Hearing Your Case Retires? Zajac III v. C.I.R., dkt. # 1886-15. (order here)

Judge Chiechi retired effective October 19, 2018 (see press release here). As indicated by the docket number, however, this case has been going on since 2015. The trial took place in early February, 2018 and briefs were submitted in May, 2018. One might ask how much is left to be done in this case (which has a somewhat unusual +100 filings with a pro se party). But the petitioner wants a second-go at the trial. And since the case involves witness credibility determinations the standard it to allow a new trial unless the parties either agree they don’t want to, or (sometimes) if the petitioner fails to ask.

How far will that new trial get the petitioner? If I had to bet, I’d say it is only delaying the inevitable. Why may it be of limited use? Consider the following: 

First, Judge Gale is quick to remind the parties of the “law of the case doctrine.” That doctrine is often raised when a case is on appeal, and stands for the proposition that “when a court decides on a rule of law, that decision should continue to govern the same issues in subsequent stages of the same case.” Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 816 (1988). As Judge Gale explains, in this context it means that “a successor judge generally should not, in the absence of exceptional circumstances, overrule a ruling or decision of the initial judge.” In other words, whatever Judge Chiechi or other judges in the case have already ruled on, Judge Gale isn’t likely to overturn. And at this point, as I alluded to earlier with the +100 filings on the docket, there have been quite a few rulings. 

Second, one of the legal arguments that the petitioner wants to make (and use a new trial to establish) pretty clearly has no traction. Perhaps unsurprisingly, it is a penalty issue that raises the specter of Graev. The petitioner wants to put the IRS supervisor that approved the penalty on the witness stand. One may wonder why the supervisor’s testimony is necessary, when all that is required is written approval under IRC § 6751(b)(1). Indeed, there has already been some case development on this point: see Raifman v. C.I.R., T.C. Memo. 2018-101, Ray v. C.I.R., T.C. Memo. 2019-36, and Alterman v. C.I.R., T.C. Memo. 2018-83, all of which provide some detail to the general rule that the Tax Court isn’t going to “look behind” a document to the reasoning or motives of the penalty approval by the supervisor. The petitioner in this case apparently wants to show that the IRS agent had a conflict of interest and, consequently, the manager shouldn’t have given supervisory approval. That is a lot like looking at the reasoning and motives of the supervisory approval, and I doubt it would succeed regardless of what the questioning elicits. In truth, if the IRC 6662(a) penalty is so ill-conceived, the taxpayer should have some other pretty obvious defenses apart from procedural infirmities… like reasonable cause or simply not having a substantial understatement (or not acting negligently) in the first place. 

But the petitioner isn’t just casually throwing the “conflict of interest” argument around: he has gone so far as to sue the IRS agent in Federal District Court under a Bivens action. That case was dismissed with prejudice. If I were a government employee that was sued by an individual taxpayer I’d probably be pretty upset too… only it appears that the suits were filed after the penalties were already proposed.

The final reason why I’m not so sure the new trial will get to a different outcome than whatever was already coming: this is a case almost entirely about determining the proper amount of self-employed income and expenses. While testimony (particularly credibility) definitely matters in such cases, the most important evidence is usually documentary. There have already been five submissions of stipulated facts and roughly 80+ exhibits. Those are in the record and aren’t going to be changed. Documents don’t always tell the whole story, and credibility determinations matter when those documents are being explained. But at this point most of the work in this 4 year-old case is, thankfully for Judge Gale, likely done.

Shades of Graev and Whistleblower Awards: Designated Orders 6/10/19 to 6/14/19

While we come to another week for designated orders, this week only had a set of three released on the same day.  Two of the designated orders are based on bench opinions from Judge Carluzzo while another order comes from Judge Gustafson.  I will begin with Judge Carluzzo’s bench opinions, which touch on Graev regarding supervisor approval.  At the end, Judge Gustafson’s order delves into IRS approvals of a different sort, this time for whistleblower awards.

Taxpayer Substantations and Supervisor Approval for More Graev Considerations

Docket No. 13675-18S, Michael Hanna & Christina Hanna v. C.I.R., Order available here.

The first order does not stand out at the beginning as Mr. Hanna testified regarding his medical expenses and employee business expenses.  He provided no other proof regarding his medical expenses, vehicle expense deduction, or purchases of tools and supplies.  Since there was no substantiation, the judge sustained those denied deductions.

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Docket No. 11648-18S, David L. McCrea & Denise McCrea v. C.I.R., Order available here.

The second order also does not seem terribly noteworthy.  Ms. McCrea ran a business as a wholesale seller of herbal medical products.  At first, the McCreas disagreed with an IRS assessment of their beginning inventory and purchases, but came to accept the IRS adjustments. 

The McCreas still disagreed with the IRS regarding their ending inventory.  The McCreas want the value to be the amount on their Schedule C for 2014.  The IRS, however, provided a different exhibit received by the IRS revenue agent during the course of examination.  The document is a physical inventory, which the petitioners claim is taken at the end of each year.  The results are provided each year on a document to their return preparer, who claimed he used the document to prepare their tax return, but did not supply the document to the IRS.  In fact, it seems a mystery for the petitioners who provided the document to the IRS.  Even though the parties’ exhibits are similar, there are items omitted from the Schedule C document that are on the IRS exhibit.  The difference between the two values is $21,112.

Judge Carluzzo finds a compromise.  The ending value on the Schedule C shall be supplemented with the items on the IRS exhibit that are not shown on the Schedule C.  The result needs to be calculated and will either match the Schedule C or a lesser amount.

The likely reason both orders were designated by Judge Carluzzo comes from an examination in both cases of 6662(a) penalties.  The evidence in each case showed that a supervisor approved imposition of a penalty on a date that preceded the issuance of the notice of deficiency.  The petitioners for each case were first formally advised regarding the imposition of the penalty on a date that preceded issuance of the notes.  As a result, the IRS imposition of the section 6662(a) penalties were rejected.

Takeaway:  Judge Carluzzo is reviewing 6662(a) penalties and will reject those penalties if they do not line up correctly in the timeline.

Whistleblower Claim Remanded to Whistleblower Office for Further Consideration

Docket No. 13513-16W, Loys Vallee v. C.I.R., Order available here.

In a whistleblower case, one of the main questions under IRC section 7623(b) is “whether the IRS collected proceeds as the result of an administrative or judicial action using the whistleblower’s information.”

Petitioner Loys Vallee provided information to the Whistleblower Office, but he was denied a claim by the IRS for a whistleblower award.  At issue before the Tax Court is the completeness of the administrative record.  Mr. Vallee filed a motion to compel production of documents in 2017 that led to what the IRS contends is the complete administrative record in 2018.  The parties filed their responses concerning the completeness of the record and it is now before the judge to make a decision.

The debate concerns the number of individuals who received the information and whether they forwarded that information to other IRS employees.  Partially, this debate is supported by the fact that not all the declarations stated that they did not forward Mr. Vallee’s filed information to any other group or person than those stated in the declaration.  Mr. Vallee provides his own list of individuals who had access to the information he provided.

Mr. Vallee makes statements concerning Corporation D, Related A, and Related B in his submissions to the Court.  Corporate D and Related A consolidated and he argued the consolidation allowed Corporate D to use Related A’s accumulated tax credits to satisfy its own tax liability in a method known as refund netting.  The Tax Court notes that Mr. Vallee did not use the term refund netting in his Form 211 or the lengthy attachments so cannot advance a new claim or try to cure deficiencies in previous claims.

The Court reviews the information from the IRS and notes there is an issue with what they provided.  The IRS states that the four individuals they cite that received the information followed the protocol of the Internal Revenue Manual (IRM) and kept the petitioner’s information confidential.  They have provided a declaration for one individual named and state there was no need to follow up with the other three individuals since her form provides feedback about the division.  Judge Gustafson disagrees, stating that while the actions discussed indicate the individuals followed IRM provisions, the IRS needs to provide affidavits or declarations concerning the other three individuals.  The declaration in question provided cannot cover personal knowledge about the actions of the other three individuals.

The judge says that there are still two unanswered questions regarding Mr. Vallee’s entitlement to a whistleblower award.  Who received the Form 211 information and what did they do with it?  Was that information used in an examination that resulted in the collection of proceeds?  Even though Mr. Vallee argues against remand, the judge shows that it is proper in a whistleblower award determination for remand regarding an insufficient administrative record.

Ultimately, the case is remanded to the Whistleblower Office for further consideration of those two questions and development of the administrative record.  The Whistleblower Office is to issue a supplemental determination with an explanation of the determination regarding the two questions.  They are to certify additions to the administrative record and that what has been provided constitutes the entire administrative record.  The judge ends by requiring the parties to provide (joint or separate) timetables for further administrative proceedings.

Takeaway:  There have been several looks at whistleblower claims in designated order blog posts in Procedurally Taxing.  While I do not know how much the IRS approves whistleblower claims, we get to review the denials.  From this vantage point, it seems like the IRS will fight the claims as much as possible.  The IRS basically attacks the claims on either of two fronts: (1) no action was taken by the IRS against anyone mentioned in the information provided or (2) any actions taken by the IRS concerning the individuals or businesses mentioned in the information provided by the whistleblower was based on other information and not based on the information provided by the whistleblower.

Mr. Vallee is fighting in Tax Court concerning the completeness of the administrative record and Judge Gustafson supports that fight by requiring the IRS to update who received that information and what actions they took.  Ultimately, the answer to be settled is whether the IRS took action against the businesses in question based on Mr. Vallee’s submission, settling whether he truly has a whistleblower claim.