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.

The IRS Loves Ambiguity, Designated Orders May 4-8 and June 1-5, 2020

The orders designated during my weeks in May and June didn’t address anything we haven’t covered before, with the exception of an order (here) referencing the Tax Court’s opinion in Lacey v. Commissioner, 153 T.C. No. 8 (2019). I started digging into the opinion to include it as part of my post, but Patrick Thomas had the same idea and did an excellent job covering it (here).

The Lacey opinion reflects the Court’s displeasure with the IRS’s use of boilerplate, ambiguous correspondence. The IRS’s use of standardized notices in many cases is understandable, however, there are times when the IRS owes a taxpayer more than a vague list of possible reasons for why it is disregarding an issue.

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The Court takes issue with IRS’s use of “and/or” in whistleblower determinations in Lacey and in CDP Notices of Determination in Alber v. Commissioner, T.C. Memo. 2020-20. I have also seen vague boilerplate responses sent in other cases (identity theft and offer in compromise examples come to mind) at a preliminary stage when IRS has decided the matter isn’t worth looking into further.

Not all cases are eligible for Tax Court review, but all taxpayers deserve to know why the IRS is not continuing to work on their case.

The IRS loves the “efficiency” of ambiguous correspondence. This is exemplified in its plan to send out notices with incorrect dates as a result of the Covid-19 shutdown (which Keith covered here). The IRS benefits from the confusion created by ambiguous correspondence because it delays or prevents taxpayers from responding in a timely or appropriate way.

The recent orders and decisions reflecting the Court’s view of ambiguous correspondence could prompt a change in IRS practices. We are at a time when everyone is imagining the ways things could be, looking at new and improved ways to operate, and resetting their expectations. The IRS desperately needs to upgrade its technology in response to Covid-19, and more generally, to finally join the rest of us in today’s world. As part of any upgrades or improvements, the IRS should consider ways that it can communicate more clearly in the responses it sends to taxpayers.

Other orders designated in May:

  • Docket No. 17614-13 and 17603-13 , Vincent J. Fumo v. CIR. Orders (here and here) granting the IRS’s motion in limine to preclude testimony from an Assistant U.S. Attorney and two revenue agents regarding the ‘manner and motives’ behind examination of petitioner’s income and excise tax liabilities.
  • Docket No. 9946-19L, Linnea Hall McManus & John McManus v. CIR. Order and decision (here) granting the IRS’s motion for summary judgement in a CDP case where petitioners did not provide requested information.

Other orders designated in June:

  • Docket No. 16492-18, Vishal Mishra and Ritu Mishra v. CIR. Order (here) granting the IRS’s motion for entry of decision in its favor, because petitioners are disputing already-conceded accuracy related penalties.
  • Docket No. 11152-18 L, Xavier Pittmon v. CIR. Order and decision (here) granting the IRS’s motion to dismiss, because the petitioner cannot contest his liability in his CDP case.  

A Webber Update, Possible Pandemic Changes, and Conservation Easements: Designated Orders 5/11/20 to 5/15/20 and 6/8/20 to 6/12/20

There were 7 designated orders during the week I monitored in May and 1 designated order for the week I monitored in June (Mark Alan Staples order), covering a variety of topics.  We start with an order updating the Webber case and its Collection Due Process issues.  Next, is there a change in the Tax Court treatment of motions to dismiss during the COVID-19 pandemic?  Following that, there are conservation easement, innocent spouse and other cases to review.

A Webber Update

Docket No. 14307-18 L, Scott Allan Webber v. C.I.R., Order available here.

Previously in Procedurally Taxing, the Webber case prompted discussion and change regarding Collection Due Process (CDP) and jurisdiction in Tax Court.  I wrote here regarding the case and Judge Gustafson’s taking issue with a prior IRS motion to dismiss.  The motion to dismiss was based on an IRS notice concerning CDP rights that had 2 addresses listed, one to request a CDP hearing and the other to make payment to the IRS on the listed amount due.  Mr. Webber had attempted to submit his CDP hearing request, but wound up mailing it to the payment address by mistake.  Based on the request’s movement through the IRS bureaucracy, it arrived at the correct location but late enough to only allow Mr. Webber an equivalent hearing (limiting his access to Tax Court review).  After Judge Gustafson took the IRS to task on the motion to dismiss as being a harsh result for such a simple taxpayer mistake, the IRS withdrew their motion to dismiss.  Things were not done regarding CDP, though, as there was a CDP Summit Initiative Workshop where these types of issues with CDP notices were discussed (also here).  Keith wrote here that a result of this discussion led to a program manager technical assistant (PMTA) memo setting new IRS policy to determine timeliness of a CDP hearing request.  The new policy is based on the type of situation above – receipt of a CDP hearing request at an incorrect office when it was mailed to the incorrect office because of being an office listed on the notice. 

I would like to also announce that the IRS is making a revision to the Internal Revenue Manual at IRM 8.22.5.3 to reflect that PMTA memo.  The revision will be effective beginning July 6 and will be incorporated into the IRM within 2 years of the date of this memorandum, reflected here (this links to a Tax Notes article available only to subscribers). 

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Got that?  Because the current designated order has a change of topic.  This designated order’s topic is shift from jurisdiction to the topic of credit elects.

In fact, Mr. Webber is dealing with a credit elect dating back to 2003 (when it was $71,012).  Over the years, that credit elect was applied to each tax year until we are dealing with the tax year at issue and the question of whether a credit elect of $77,782 from 2012 applies to his 2013 tax return.  If so, it reduces his 2013 total tax of $5,690 so that there is a credit elect of $72,092 that would carry to the 2014 tax return.

The problem is that Mr. Webber has received conflicting messages from the IRS regarding allowance of the credit elect over the years.  Certainly, removing an earlier link in the chain of credit elects would affect the 2013 tax year.  Part of the problem is that the review by Appeals during his CDP hearing was not honoring a prior IRS letter allowing the credit elect for tax years 2004 and 2005.

This order deals with both an IRS motion for summary judgment and Mr. Webber’s response, which contains a motion to dismiss and a motion to remand.

Mr. Webber presents the issue raised, the availability of the credit elect for tax year 2013, as a challenge to the existence of an underlying liability.  He contends that no valid CDP hearing was conducted asking to dismiss for lack of jurisdiction, but also asking for a remand back to Appeals for them to take appropriate action.  The judge finds dismissal for lack of jurisdiction to be unwarranted.  Regarding remand, Judge Gustafson says it may or may not be necessary based on the IRS argument concerning the credit elect issue in the CDP hearing so no remand at this time.  Both motions are denied (the motion to remand denied without prejudice).

While the Court is not adjudicating Mr. Webber’s entitlement to the overpayment underlying the credit elect in 2013, the Court does have the responsibility to determine if the IRS allowed the overpayment but failed to credit it.  The Court states that is a genuine dispute of material fact since Appeals gave a statement in 2012 that they are allowing the full amount of the claimed credit elect for 2004 and 2005.  Appeals stated in the more recent CDP hearing that the question needed to be resolved outside Appeals so the Court reviews possible reasoning (statute of limitations, non-determination years, or refunds received).  None of that is conclusive so there is a genuine dispute of fact, leading to denial of the motion for summary judgment.  The parties are currently filing joint status reports to the Court.

Bob Kamman wanted to let us know about some coincidences – there is a citation in this order to a published Tax Court opinion from 2012 that also involves a credit-elect dispute in a CDP context.  The taxpayer is named Hershal Weber and the opinion was written by Judge Gustafson.  The more things change, the more they stay the same?

Stance on Motions to Dismiss During Pandemic?

Docket No. 10386-19S, Salvador Vazquez, v. C.I.R., Order available here.

This order is rather short, but notable.  The order begins by stating this case was scheduled for the Los Angeles trial session beginning June 1 before COVID-19 disrupted the Tax Court calendars.  The IRS filed a motion to dismiss for failure to properly prosecute on May 6, stating that the petitioner failed to respond to numerous attempts by the IRS to make contact.

Judge Carluzzo states:  “Under the circumstances and at this stage of the proceedings, we are reluctant to impose the harsh sanction that respondent requests. Our reluctance, however, to impose the sanction at this time in this case should not in any way be taken as a suggestion that a party’s behavior, as petitioner’s behavior is described in respondent’s motion, could not support such a sanction under appropriate circumstances.”

It is too soon to tell if this is any type of new position for the Tax Court regarding motions to dismiss during these pandemic times.  Since then, the judge ordered the parties to, separately or together, submit reports by August 24.

Conservation Easements

In recent years, the IRS has been taking a harder stance against several organizations that have claimed deductions for the donations of conservation easements.  For those looking to learn more about the issues, I recommend listening to two of the June 2020 podcast episodes from Tax Notes Talk.  A problem I have noticed is that both the bad apples and the good ones have been swept up in the IRS enforcement efforts.  For example, a request I have seen from the good apples is that they would like to get sample language from the IRS on how to draft documents relating to the conservation easement donation that will be satisfactory to the IRS.

One current development regarding conservation easement cases is that the IRS announced in IR-2020-130 that certain taxpayers with syndicated conservation easement issues will receive letters regarding time-limited settlement offers in docketed Tax Court cases.  Perhaps that will help reduce the conservation easement cases on Tax Court dockets.

  • Docket No. 5444-13, Oakbrook Land Holdings, LLC, William Duane Horton, Tax Matters Partner v. C.I.R., Order available here.

Oakbrook Land Holdings would like to reopen the record to add four deeds from the Nature Conservancy that have language to support the argument that Oakbrook’s deed doesn’t violate the regulation regarding their conservation easement donation.  The Court ruled the evidence is merely cumulative.  Also, the Conservancy’s comments, not practices, are what is discussed so the proffered deeds won’t change the outcome of the case.  The motion to supplement the record is denied.

  • Docket No. 10896-17, Highpoint Holdings, LLC, High Point Land Manager, LLC, Tax Matters Partner, v. C.I.R., Order available here.

This case required a look to state law in Tennessee regarding interpretation of the deed at issue and that does not help Highpoint Holdings.  The IRS motion for partial summary judgment is granted and the parties are to submit their status reports on how to proceed in the case.

Innocent Spouse

Docket No. 4899-18, Doris Ann Whitaker v. C.I.R., Order available here.

This is an innocent spouse case that came to Tax Court as Ms. Whitaker is seeking relief from joint liability for 2005 income tax, pursuant to IRC 6015(f).  Ms. Whitaker has not completed high school and is employed as a nurse’s aide.  When filing the 2005 tax return, income attributable to her then-disabled and drug-addicted husband was not reported on the return.  Ms. Whitaker did not report his income as she incorrectly understood “married filing jointly” to mean “married filing separately”.  Basically, she thought filing the joint return took care of her obligations and her husband was required to file his own separate return.

The IRS filed their motion for summary judgment, arguing “there remains no genuine issue of material fact for trial”.  The Court, when reviewing the facts and circumstances, takes Ms. Whitaker’s education and resources into account and finds this factor is sufficient to prompt a holding that there is a genuine issue of material fact to prompt denial of the motion without prejudice.

However, what to make of the recent amendment to IRC 6015(e)(7)?  The amendment requires the Tax Court to review applicable innocent spouse cases based on (A) the administrative record established at the time of the determination, and (B) any additional newly discovered or previously unavailable evidence.  What should be done with motions for summary judgment in conjunction with these evidentiary requirements?  In this case, only the IRS motion is on hand.  The Court has the discretion to construe an opposition to a summary judgment motion as a cross-motion for summary judgment but only where the parties have adequate notice and adequate opportunity to respond.  There was no such notice to treat Ms. Whitaker’s opposition as a cross-motion.  The Court orders the parties to communicate toward settlement.  The next order is for the IRS to file a certified administrative record and motion for summary judgment based on that record.  Ms. Whitaker is ordered to file any objections she would have about the administrative record, a response to the motion and a cross-motion for summary judgment.  The Clerk of the Court is also ordered to serve on Ms. Whitaker a copy of the information letter regarding the local Low Income Taxpayer Clinics potentially providing assistance to her (this case is being worked by Winston-Salem IRS Counsel so presumably this would be the 2 North Carolina clinics).

There have been subsequent orders filed in this case.  The first order relays that in a telephone conference between the parties that the IRS is conceding the IRC 6015 issue in the case so the parties are ordered to file a proposed stipulated decision or joint status report no later than July 17.  The second order relays that the IRS filed a motion for entry of decision on June 24, proposing a zero deficiency and no penalty due for the 2005 tax year, after applying IRC section 6015(b), and there is no overpayment in income tax due to petitioner for the 2005 tax year.  However, the motion states that the petitioner objects so Ms. Whitaker is to file no later than July 24 a response to the motion explaining why it should not be granted and a decision should be entered in this case.

Unless there is a procedural issue in her case I am overlooking, I find this to be a win for Ms. Whitaker and think she should not file a response to the motion.

Short Takes on Issues

  • Docket No. 6946-19SL, Soccer Garage, Inc., v. C.I.R., Order available here.

This case concerns Collection Due Process regarding a levy and penalties for failure to file.  The IRS argues there was an intentional disregard of the filing requirement.  There are not enough facts provided regarding the petitioner’s intent so the Court denied the IRS motion for summary judgment.

  • Docket No. 10662-19W, Wade H. Horsey v. C.I.R., Order available here.

Mr. Hosey requested the reconsideration of the determination of a whistleblower claim and his motion was denied.

  • Docket No. 6560-18, Mark Alan Staples v. C.I.R., Order and Decision available here.

Mr. Staples filed a motion for new trial that the Court had to recharacterize as a motion for reconsideration of findings or opinion.  Mr. Staples made arguments about the characterization of his retirement benefits, Constitutional arguments, and generally argued about his computation regarding tax year 2015.  The Court denied the motion as the IRS computations were in line with the Court’s memorandum findings of fact and opinion.  On this case, I am generally confused by the petitioner’s actions – was he a tax protestor or just ignorant of tax procedure?  Either way, his motion was filed in vain.

 

Spousal Support Agreements in Collections Analysis – Designated Orders – March 30 – April 3, 2020

This week is somewhat light, but one order from Judge Panuthos in a CDP case breaks new ground. Additionally, the Court continues to make accommodations due to the fallout from the COVID-19 pandemic; Judge Gale and Petitioners’ counsel had to figure out how to accommodate a document that couldn’t be e-filed while the Court’s mailroom was shut down. I cover this issue in a separate post here.

The other major order came in Cannon Corp. v. Commissioner, where Judge Holmes denied summary judgment for Respondent in a 6751 penalty approval case. Keith previously covered this order here. Take a look at Keith’s post for details on this order from Judge Holmes (another order that I, again, must question why it doesn’t appear in an opinion).

Judge Kerrigan also issued an order granting Respondent’s motion for entry of decision where Petitioner tried to unwind previously filed stipulations.

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Docket No. 11337-19L, Behn v. C.I.R. (Order Here)

Judge Panuthos’s order in Behn breaks, I think, some new ground on what expenses Appeals might permissibly consider in crafting a collection alternative for a taxpayer who cannot afford to pay their outstanding liability in full.  The procedural background here is somewhat complex—only one year is properly before the Tax Court, but the Petitioner owes on 12 different tax years (some of which were previously resolved in a CDP case in the Tax Court by placing Petitioner’s accounts into currently not collectible status).

Here again, Petitioner received a Notice of Intent to Levy for multiple tax years and requested a CDP hearing. With the Form 12153, Petitioner included a direct debit installment agreement request, with a proposed monthly payment of $300. Petitioner participated in the telephone hearing that the Settlement Officer scheduled, but didn’t submit financial information ahead of the hearing. Nevertheless, the SO determined that he qualified to claim nearly $1,800 in monthly expenses. Set against his $4,300 in monthly pension income, this left him about $2,500 in net monthly income—far more than the $300 per month he’d proposed.

However, Petitioner raised in the CDP hearing the $1,800 per month he pays his spouse in “spousal support.” But there was no court order mandating this payment, which the IRS requires when proving monthly child support or spousal support payments, see I.R.M. 5.15.1.11 (“If alimony and child support payments are court ordered and being paid, they are allowable.”). Because of this, the SO stuck with the $2,500 proposed monthly payment, after review from her manager. Ultimately, the SO issued a Notice of Determination upholding the levy, for the reason that Petitioner failed to come into filing compliance for tax year 2012.

Judge Panuthos appears to find the issue of legal liability controlling—not whether the obligation is specified in a written court order. Apparently, under California law, one can potentially be liable for spousal support if the parties agree to provide support. He cites California Family Code § 4302, and the cases of Verdier v. Verdier, 36 Cal. 2d 241, 245 (1950) and In re Caldwell’s Estate, 67 Cal. App. 2d 652 (1945). Both of these cases suggest a court could find that the parties independently established a legally binding support agreement.

However, not all legal obligations qualify as necessary expenses under the Internal Revenue Manual. Credit card and personal loan expenses, for example, are not considered “necessary” and do not offset income, because they represent payment for a previous obligation incurred to buy some other expense (necessary or otherwise). See I.R.M. 5.15.1.11. Of course, those payments would be deemed as necessary under the IRM if a taxpayer fails to make those payments, and an unsecured creditor obtains a court judgment and the court then orders payments. Id. Still, these spousal payments are somewhat different, as they’re not as easily excluded as a policy matter as unsecured debts, given that they represent an independent payment obligation and don’t raise the “double counting” concern that likely excludes unsecured debts under the IRM.  

Even if this expense were included, Petitioner’s net monthly income would still not be reduced to the $300 per month payment he proposed. It would, however, substantially reduce it to about $700 per month. And perhaps that would be agreeable.

Finally, I’ll note too that Judge Panuthos did not issue summary judgment because of the reason stated in the Notice of Determination: that Petitioner had failed to file his 2012 tax return. While not discussed in the order (I also haven’t reviewed Respondent’s motion), 2012 should not be, at this point, required to come into compliance under the Internal Revenue Manual, as the IRS generally only requires the past 6 years to be filed. See I.R.M. 5.1.11.7.1(4). This was also true at the time Appeals issued the Notice of Determination in July 2019, but not at the time of the Appeals hearing itself.

This will certainly be an interesting case to watch when it comes back to the Court.

Docket No. 22864-18, Minnig v. C.I.R. (Order Here)

This relatively uncomplicated bench opinion comes from Judge Kerrigan in a deficiency case. The facts here are simple. The taxpayer earned income reported on a Form W-2, but they filed a federal income tax return that reported $0 of income. So, the IRS issued a notice of deficiency.

Respondent apparently conceded the 6662 penalty and the 6651(a)(2) penalty, but won on the underlying tax liability and 6651(a)(1) penalty for failure to timely file the tax return. Aside from that, this is an easy win for Respondent. Apparently, Petitioner put forth numerous frivolous arguments, both as to the tax liability and the failure to file penalty, which Judge Kerrigan did not substantively address.

I defer to Judge Kerrigan’s view of the case and the situation at trial. But I do wonder if the section 6673 penalty was considered in this case—either by IRS counsel or by the Court.

Ultimately, the opinion does note that Respondent conceded two of the penalties at issue. The section 6651(a)(2) penalty doesn’t seem appropriate in any case; the taxpayer didn’t report anything as “tax on the return”, which is the only thing to which section 6651(a)(2) can apply. Rest assured that if the taxpayer continues to fail to pay, the IRS will swiftly assess the section 6651(a)(3) penalty for failure to pay after notice and demand.

It does not seem like there’s anything immediately wrong with imposing a section 6662(a) penalty for negligence. Indeed, Petitioner’s position seems to rise well above negligence. Perhaps Chief Counsel had a 6751 problem? Although hard to tell from the opinion itself, this might be a reason it would make sense not to impose the 6673 penalty. After all, multiple positions of the Commissioner in the Notice of Deficiency were, in fact, erroneous.

Docket No. 3057-19S, Nixon v. C.I.R. (Order Here)

Our last order comes from Judge Gale on Respondent’s motion to dismiss for lack of jurisdiction as to joint petitioners in a deficiency case.

Prior to filing the Tax Court petition, Mr. Nixon filed a bankruptcy petition. A review of both dockets reveals that Mr. Nixon filed a Chapter 13 petition on January 21, 2019 and filed the Tax Court petition on February 27, 2019, at which time the bankruptcy case was still open. That bankruptcy case was dismissed in October 2019, but Mr. Nixon refiled in November 2019, and that case still remains open.

The automatic stay provision of Bankruptcy Code section 362(a)(8) divests the Tax Court of jurisdiction until the bankruptcy case ends. Specifically, section 362(a)(8) says that “[a bankruptcy petition] operates as a stay . . . of . . . the commencement or continuation of a proceeding before the United States Tax Court concerning a tax liability . . . of a debtor who is an individual for a taxable period ending before the date of the [bankruptcy discharge order].”

Such bankruptcy debtors aren’t without recourse, however, in disputing the IRS’s determination in the Notice of Deficiency. The bankruptcy court itself could review determine the taxes owed for the disputed year—though see Bush v. United States, 939 F.3d 839 (7th Cir. 2019) (which Keith covered here)for some significant limitations on when the bankruptcy court might exercise its discretion to do so.

Alternatively, section 6213(f) contemplates this scenario, and provides that the 90 day period within which to petition the Tax Court is tolled from the time the bankruptcy petition is filed until the case is discharged or dismissed, plus 60 days. Helpfully, Judge Gale includes a citation to this corollary provision that for Mr. Nixon’s benefit.

In any case, Mr. Nixon had no ability to commence a case in his own right when he did. So, Respondent filed its motion to dismiss the case as to Mr. Nixon—but not as to Mrs. Nixon, who was not a party to either bankruptcy case. Judge Gale explains the law above and grants Respondent’s motion. He also notes that Mrs. Nixon and Respondent had agreed to settle the case; the stipulated decision reveals the parties settled for a deficiency of $3,000 and $4,500 for 2015 and 2016, respectively. They also agreed that no penalties would be imposed. I don’t have access to the underlying Notice of Deficiency, but this sounds like a reduction to the amounts the IRS proposed.

So, what happens to Mr. Nixon? The IRS cannot assess the amount proposed in the Notice of Deficiency against Mr. Nixon because of (1) the automatic stay and (2) the 6213 prohibition that is now continued under 6213(f). But because the tax is joint and several for a jointly filed return under section 6013(d)(3), and because Mrs. Nixon has agreed to waive the restrictions on assessment under 6213 as to herself, the IRS will assess the settled amount against her.

Let’s say that she pays it, Mr. Nixon agrees with that result, and then doesn’t petition the Tax Court as Judge Gale suggests he could. Could the IRS assess the (likely larger) tax contemplated in the Notice of Deficiency against Mr. Nixon? I think it could. Will it? No. The Service’s policy is to provide the same assessment amount for jointly filed tax returns, even if only one party to the joint assessment invoked the Tax Court’s jurisdiction.

I had a similar case involving a taxpayer’s widow, who did not want to open an estate for the mere purpose of ratifying the petition.  Counsel assured me that the IRS would assess the tax on both accounts based on the Tax Court settlement; that is indeed what occurred.

One interesting counterfactual question: let’s say that Mr. Nixon’s bankruptcy case had concluded by the time the Tax Court was ready to rule on Respondent’s motion to dismiss. Would the Tax Court have allowed Mr. Nixon to ratify the Petition? 

No. The automatic stay bars the ability of a taxpayer to petition the Tax Court in the first instance. Those were also the facts in McClamma v. Commissioner, which Judge Gale cites in his order. The taxpayer would need to file a new petition, within the extended time frame under section 6213(a) & (f).

But what if by the time the motion was ready for review, Mr. Nixon’s time to file the Petition under 6213(f) had expired? Same story. As above, his time to file a petition in the Tax Court would have expired, and the IRS would proceed to assess the tax—albeit in the reduced amount noted above. As readers are aware, the Tax Court has taken a stringent view of its jurisdictional grants and while judges often write that they are “sympathetic” to the taxpayer’s situation, they nevertheless dismiss the case for lack of jurisdiction. Equity plays little role. See, e.g., Zimmerman v. Commissioner, 105 T.C. 220 (1995) (dismissing where the bankruptcy court notified petitioners of the discharge 137 after it was entered—leaving petitioner with only 13 days to file); Drake v. Commissioner, 123 T.C. 320 (2004) (dismissing a standalone innocent spouse case, even though section 6015 lacks a tolling provision similar to section 6213(f)); Prevo v. Commissioner, 123 T.C. 326 (2004) (same for CDP petitions).