With Great (Tax) Knowledge Comes Great(er) Barriers to the Reasonable Cause Exception. Designated Orders, November 4 – 8, 2019

It was a busy week at the Tax Court, with six designated orders. The orders that weren’t issued by Judge Buch were fairly unremarkable: a tax protestor avoiding (for now) an IRC 6673 penalty here and an order granting summary judgment to the IRS in a Collection Due Process case where the petitioner failed to submit information at the hearing here. Two of Judge Gustafson’s orders were essentially duplicates (same issue, different tax years) dealing with a partnership squabbling over tax settlement terms that are more beneficial to some partners than others (here and here). I was most interested by the lessons that could be found in Judge Buch’s orders, however, and thought that they provided an interesting lesson on the interplay of IRC 6662 and taxpayers of varying sophistication. Deep dive below the fold…

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Getting out of the IRC 6662 Accuracy Penalty: Being a Tax Preparer vs. Relying on a Tax Preparer: Jacobi v. C.I.R., Dkt # 17490-17 (here) and Atala v. C.I.R., Dkt. 9620-18 (here)

Both of Judge Buch’s orders were bench opinions, and both involved (among other things) whether an accuracy penalty should be imposed against the taxpayers. In one of the cases it is easy to sympathize with the taxpayer -in the other, not so much. And yet even the sympathetic taxpayer ends up no better off than the unsympathetic taxpayer with regards to the accuracy penalty… I found this result interesting (perhaps even incorrect) for reasons I will detail later. 

Let’s start with the easy case: Jacobi, where the taxpayer was a CPA that ran his own tax business. Mr. Jacobi’s return is a mess (as one example, he reported almost $60,000 in “cost of goods sold” for his accounting firm, $40,000 of which he tried to double-count as legal fees on a later amended return), and he should clearly know better. He also literally won a +$1M lottery and took a position that the winnings should be taxed at lower capital gains rates than what us working stiffs pay on our ordinary income. This is not a sympathetic taxpayer. But let’s run through his potential avenues for avoiding an IRC 6662 penalty anyway.

First, one may try to attack the penalty on purely procedural grounds -that is, the infamous requirement of supervisory approval under IRC 6751. This opinion doesn’t actually address whether there was supervisory approval for the penalty, and it is unclear whether it was raised or conceded as an issue. PT has covered these sorts of concerns here and here. For now, let’s just assume that there was supervisory approval and it was properly entered into evidence, thus denying the procedural attack for Mr. Jacobi.

Where the IRS asserts an IRC 6662 penalty for “substantial understatement” (6662(b)(2)) a second argument one can make is that their understatement simply wasn’t “substantial” to begin with. This “mistaken identity” argument is largely a numbers game, with the goal of getting the understatement under “the greater of” 10% of the total tax that should have been on the return, or $5,000, whichever is larger. IRC 6662(d)(1)(A).

Even if you can’t do this by prevailing on the merits, you can still do it if you show that a portion of your understatement had either “substantial authority” for your (wrong) position, or you adequately disclosed your position and had “reasonable basis” for it. IRC 6662(d)(2)(B). Basically, your error is removed from the size of your total “understatement” if you meet either of those exceptions. Because Mr. Jacobi’s tax return didn’t adequately disclose “the relevant facts” for his position that the lottery winnings were capital gains, he would need to show “substantial authority” (which is more demanding than “reasonable basis”) to avoid the IRC 6662(b)(2) penalty attributable to that error.

So what authority did Mr. Jacobi rely on for his lottery position, and is that authority “substantial?” You be the judge: for the novel idea that lottery winnings are capital, not ordinary, income Mr. Jacobi apparently relied on a passing conversation with a (now deceased) CPA. The Treasury Regulation on point (Treas Reg. 1.6662-4(d)(3)) provides a whole list of what sources taxpayers can rely on for substantial authority. Not surprisingly, “passing conversation with CPA” doesn’t make the list. Especially when, as Judge Buch notes, “even a cursory search (if one occurred) would have revealed that ““There is no question that lottery payments in the first instance were ordinary income.”” (Quoting Clopton v. C.I.R., T.C. Memo. 2004-95.)

Because there (apparently) are no procedural issues and the understatement is “substantial” under IRC 6662(b)(2) the only remaining hope Mr. Jacobi has left is to argue “reasonable cause” for the mistake under IRC 6664(c). The opinion doesn’t actually address reasonable cause at all (it is unclear if it was raised by the taxpayer, which it would need to be as an affirmative defense). In any event, it’s probably safe to say that it doesn’t exist to excuse Mr. Jacobi’s errors: unsympathetic and sophisticated taxpayers face an uphill battle on reasonable cause.

To better understand the reasonable cause exception, it is instructive to look at the second bench opinion issued by Judge Buch: one that appeared to involve a (more) sympathetic and less-tax-savvy taxpayer: Atala v. C.I.R.

Ms. Atala’s tax situation in 2014 invokes a number of thorny issues: her filing status; community property income; substantiation issues with charitable donations; unreimbursed business expenses; and substantiation issues with her own side-business. This is close to a “greatest-hits” compilation from the National Taxpayer Advocate’s perennial “Most Litigated Issues” list.

This does not appear to be a case of the taxpayer creating the problem all on their own (for example, by just making up charitable donations). In this case, Ms. Atala appears to have lived with her husband until November 2014; frequently was required to travel for work; could substantiate cash contributions to charity (in the amount of $8050) but didn’t have an itemized receipt for her non-cash donations. For almost every issue that went against Ms. Atala there appeared to be at least some mitigating factor (or rationale) for why the mistake may have happened. And on top of all of that, Ms. Atala relied on a tax return preparer to sort these things out in filing her 2014 return. But apparently the return still got things wrong. So much so, in fact, that an IRC 6662 penalty for substantial understatement was imposed. 

But might Ms. Atala have a case for the “reasonable cause” exception where Mr. Jacobi, CPA, did not? One may be inclined to think so. 

“Reasonable cause” is essentially an equitable relief provision. The statute asks whether the taxpayer acted “in good faith” and the regulation provides that “Generally, the most important factor is the extent of the taxpayer’s effort to assess the taxpayer’s proper tax liability.” Treas. Reg. 1.6664-4(b)(1)

As we are told ad nauseum “taxes are hard,” so innocent mistakes are likely to be made. It seems punitive to impose a penalty on mistakes made by taxpayers making a good faith effort to get it right. And to some degree you can find this intuitive notion taking hold in court decisions, where it appears judges are loath to penalize pro se petitioners appearing to be caught in the web of our tax code. I even recall at a previous ABA Tax Section conference one Tax Court judge providing a general rule where if it took two pages to explain the law at hand and why the taxpayers application of it was incorrect, the judge was less likely to uphold an accuracy penalty. 

Beyond general equitable notions of “trying your best,” a particular safety-valve has developed through court decisions where taxpayers rely on a tax return preparer. The leading case is Neonatology v. C.I.R., 115 T.C. 43 (2000), which provides a list of factors for when reliance on a tax professional might get you out of an IRC 6662 penalty, broken down generally as: (1) was the advisor competent enough to reasonably rely on, (2) did the taxpayer provide enough information to the advisor, and (3) did the taxpayer actually (in good faith) rely on the advisor? Mr. Jacobi probably didn’t do so in good faith… and there are perhaps questions whether this supposed conversation ever even occurred with the now-deceased CPA. So Neonatology is probably unavailing for him. What about for Ms. Atala?

The court’s analysis on that point is a bit confusing to me, and it never directly addresses Neonatology. In Judge Buch’s words, “Although Ms. Atala used a return preparer, the deficiencies principally relate to a failure to substantiate expenses, and she testified that she provided the information that was reported to the return preparer. Ms. Atala did not establish reasonable cause for her understatement.” I take Judge Buch’s reasoning to be that you don’t get a free pass by just giving numbers to a tax preparer without anything more. However, I think that may be a bit uncharitable. The facts show that the tax preparer never actually asked for any proof of the expenses -and that at least some of the expenses (the substantial cash charitable deductions) did end up being substantiated. Perhaps this is a way of saying “you gave some information, but not enough information to rely on the tax preparer in good-faith” (prongs 2 and 3 of Neonatology argument).

But I am also surprised at the penalty for another reason. At least some of the underlying deficiency results from the Court’s finding that Ms. Atala was not entitled to claim her minor niece and nephew as dependents.

Normally this would be unremarkable. Except that this is not a case where a taxpayer just puts a related individual on their return that they have had nothing to do with. Rather, the facts here show that Ms. Atala lived with her niece and nephew in the tax year and provided their housing. Those facts show (or strongly suggest) all of the key tests met to be a qualifying child: age (the niece and nephews are minors), relationship (niece and nephew suffices), and residency. The only test remaining is support… and here I actually think Judge Buch gets the law wrong. 

Judge Buch finds the elements I quoted to be met, but nevertheless does not find that the niece and nephew are qualifying children. This is because Ms. Atala “did not show that she provided support for her niece and nephew aside from providing housing, as required by section 152(c)(1)(D).”

The problem is that section 152(c)(1)(D) says something quite different than that the taxpayer must show they supported their qualifying child. What it actually says is that a qualifying child is an individual that “has not provided over one-half of such individual’s own support[.]” [emphasis added]. In other words, the test is whether the child supported themselves. It is (mostly) immaterial who the support came from so long as it wasn’t the minor supporting themselves. Over half the support could have been provided by Santa Claus, Ms. Atala, or a friendly neighbor. In all cases the support test would be met with regards to Ms. Atala. Minors don’t usually support themselves, so I rarely have to quibble with the IRS on this point. But here it appeared to be a difference-maker. 

This is particularly important because one of the main benefits Ms. Atala was seeking was the Child Tax Credit, which (unlike the Earned Income Credit)  you can receive even if Married Filing Separate (which is what Ms. Atala’s filing status would be, since she appears ineligible for Head of Household). In 2014, this could have shaved off a solid $2,000 of tax. Or at the very least, shave off the accuracy penalty associated with that understatement.

Finally, recall that this was a bench opinion -which, being non-reviewed and non-precedential, would seem to be ideal for equitable arguments and sympathetic taxpayers. And though I am not privy to all of the facts and circumstances of the case, that the penalties were upheld in a bench opinion contributed to my surprise. To me, it looked like an instance where with the right advocacy Ms. Atala may have had a strong case to get out of the penalty -or even get some of the credits related to her niece and nephew that she originally claimed.

Sanctions, Converted Items Confusion and More, Designated Orders: October 14, 2019 – October 25, 2019

Only one order was designated during Patrick Thomas’s week, the week of October 14, 2019, and two during mine, the week of October 21, 2019. As a result, this is a joint post from Patrick and me covering both weeks. It begins with Patrick’s coverage of the one order designated during his week.

Docket  No. 12646-19, Brown v. C.I.R. (Order Here)

This short order displays the power of the Tax Court to sanction taxpayers who raise frivolous arguments or institute proceedings in the Court merely for purposes of delay. The Tax Court has a busy docket, handling approximately 25,000 new cases each year. Frivolous claims and proceedings instituted merely for purposes of delay clog that docket, at the expense of taxpayers who have legitimate disputes with the Service.

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This case deals with Petitioner’s 2008 federal income taxes—with a petition filed on July 9, 2019. Given that timing, Respondent unsurprisingly filed a motion to dismiss for lack of jurisdiction, presumably arguing that Petitioner failed to file the petition within 90 days of the notice of deficiency.

The Petitioner in Brown had previously filed three cases in the Tax Court. In Docket 7375-18, he failed to pay the Court’s filing fee, and the case was accordingly dismissed. In Docket 4754-19, he raised a constitutional challenge to paying the filing fee, which the Court swiftly disposed of; constitutional challenges to the payment of filing fees are rarely successful. And after all, if Petitioner had a financial inability to pay the fee, the Tax Court provides a remedy through the fee waiver application. 

Finally, in a case entitled “Estate of Ernest Richard Brown v. Commissioner”, at Docket 12335-11, the Court likewise dismissed the case due to failure to pay the fee and to properly prosecute the case.

Judge Carluzzo, in the present order in Docket 12646-19, notes that “a copy of the notice of deficiency [for 2008] is attached to the petition filed May 24, 2011,” but that in the present case, Petitioner denied ever receiving the notice. Accordingly, he regards that allegation as “patently false”.

Accordingly, Judge Carluzzo not only grants Respondent’s motion to dismiss, but also imposes a $500 penalty for the “frivolous pleading” in this case. I’m not sure if this low amount will dissuade Petitioner from continuing to challenge the liability. But as we’ve seen before, further frivolous proceedings will only lead to escalating penalties. And while the 6673 penalty is limited to $25,000, the penalty is imposed on any “proceedings” instituted before the Court—suggesting that the penalty could exceed $25,000 if Petitioner continues to file frivolous pleadings.

Docket Nos. 1143-05, 1144-05,1145-05, 1334-06,1335-06, 1504-06, 20673-09, 20674-09, 20675-09, 20676-09, 20677-09, 20678-09, 20679-09, 20680-09, 20681-09, David B. Greenburg, et. al. v. C.I.R. (Order Here)

This order involves a long-running consolidated, in-part TEFRA-related and in-part-deficiency-related case. It previously had orders designated during my week in September, which I didn’t specifically address, but now feel is unavoidable.

I must admit its significance is a bit lost on me – likely because it lives (somewhat) in the world of partnerships and TEFRA. 

The case was already heard, decided (the opinion is here) and is in the computation stage, but the petitioners moved the Court to dismiss the case for lack of jurisdiction in August and the Court addressed- and denied – the motion. This most recent order was filed in October and asks the Court to reconsider that denial. 

The October motion reiterates the arguments in the August motion, which seem to also be arguments that were addressed in the opinion (but with more focus on an issue with the partnership’s TEFRA election).

So what is it that petitioners keep arguing about? The IRS had sent notice to the petitioners about converting certain specified items into non-partnership items as result of a criminal investigation. This is permitted by section 6231(c)(1)(B). Once the items are converted, they are subject to deficiency proceedings rather than TEFRA proceedings because they are no longer considered to be partnership items.

Petitioners argue the Court does not have jurisdiction because the IRS asserted that certain items were converted items, when they were actually non-partnership items. This confuses the Court, because converted items are considered non-partnership items.

In other words, the crux of the petitioners argument is that a distinction should be made between “partnership items originally, but converted under TEFRA into nonpartnership items” and “items that aren’t converted into nonpartnership items by a converted items notice of deficiency because they are already nonpartnership items” and the Court doesn’t have proper jurisdiction over the latter.

The Court said it cannot make this jurisdictional distinction without some legal authority for doing so. It finds that it has jurisdiction over all of the items, even though the way in which the items became subject to the Court’s jurisdiction differed.

The Court acknowledges that the parties have preserved this issue for appeal (which is likely petitioners’ goal) and denies petitioners’ motion to dismiss yet again. 

Docket No. 17286-18, Michael Sestak v. CIR (Order Here)

In this order, Judge Buch holds the IRS to a high standard (ironically, its own) when applying the last known address rule.

Petitioner notified the IRS of his change of address when he began serving a five-year sentence in a federal prison – the only part that he did not communicate was his prison registration number, which is the number used to identify individual inmates. The IRS received this correspondence because petitioner also requested an abatement of failure to file penalties due to the reasonable cause of his imprisonment, which the IRS granted.

In addition to petitioner’s correspondence, a relative of petitioner sent a letter to the IRS that discussed petitioner’s prison sentence and included petitioner’s new address, this time with his prisoner registration number. The IRS retained this letter in its records.

Then the IRS sent petitioner a notice of deficiency to the address petitioner provided without the prisoner registration number. The petitioner never received the notice of deficiency and only became aware of it after he started receiving collection notices. A year and a half after the notice of deficiency was sent, petitioner petitioned the Tax Court.

IRS moves to dismiss the case for lack of jurisdiction because the petition was not timely filed, arguing that it reasonably relied on petitioner’s letter (which, again, did not list the prisoner registration number) when it sent the notice to petitioner’s last known address.

If the IRS does not exercise reasonable diligence and sends a notice of deficiency to an incorrect address, the notice of deficiency is deemed invalid. The Court addressed this issue more generally in Keeton v. Commissioner, holding that the IRS did not use the last known address when it knew the taxpayer was incarcerated and didn’t send the notice to the prison.

This order takes that decision one step further. The IRS was aware of the incarceration and sent the letter to the prison, but the Court still finds that that wasn’t enough.

Referencing the IRM (while acknowledging its non-precedential value), the Court states,

The Commissioner’s own manual gives instructions for mailing notices of deficiency to incarcerated taxpayers. The Internal Revenue Manual (IRM) states that the address on the notice of deficiency “should reference the prisoner locator number, if available.” The IRM provides a link to the Bureau of Prisons website where Service personnel may find prison locator numbers and addresses. The IRM thus states that a complete address for a prisoner contains the prisoner registration number and then provides a link to find that number. Therefore, the Commissioner knew he had an incomplete address for [petitioner] because the IRM stated that a prisoner address should contain the prisoner’s registration number.

The IRS asserts that it acted reasonably because the notice was sent by the Automated Underreporter System to the address on file. The Court finds that requirements under the last known address rule of section 6212(b) do not depend on which system the IRS uses to mail the notice and due diligence is required when the IRS is aware an address is incorrect or incomplete. The Court dismisses the case for lack of jurisdiction but not on the IRS’s proposed basis, but rather on the basis that the notice of deficiency was invalid since it was not sent to the taxpayer’s last known address.

Issues in Motions to Dismiss for Lack of Jurisdiction: Designated Orders 9/30/19 to 10/4/19

For the work week of September 30 through October 4, there were 4 designated orders.  Three have substantive issues (and all have motions to dismiss for lack of jurisdiction), discussed below.  The first order is a tangled series of notices and petitions that Judge Copeland sorts through.  For the last two orders, Judge Guy deals with two very different cases that both have motions to dismiss for lack of jurisdiction.  In contrasting the two, one involves the definition of a deficiency and the other deals with the classification of a remittance as either a payment or a deposit.

For the fourth order, available here, I wanted to take a brief moment to acknowledge that the Tax Court referred the petitioner to contact local Low Income Taxpayer Clinics to see if they could help.  The clinics are those covering the Tampa, Florida, Tax Court docket (Bay Area Legal Services, Gulfcoast Legal Services, and Florida Rural Legal Services).


3 Notices and 3 Petitions

Docket No. 4460-17, Tramy T. Van v. C.I.R., Order available here.

To provide some clarity, it will be necessary to include some tables regarding the notices sent by the IRS and petitions filed by Ms. Van (sometimes referred to specifically as Petitioner) and her ex-husband, Denny Chan.

In 2010, Tramy Van and Denny Chan were married.  They filed a joint tax return in 2010 that included a $192,763.00 net operating loss carryforward.  They divorced after 2010 so none of the other tax returns involved are joint returns.

On 11/23/16, the IRS mailed three notices of deficiency.  The first notice was for tax years 2011, 2012, and 2013 (Notice # 1).  That notice was sent only to Petitioner at her last known address and she received it.  It proposed several adjustments, including an adjustment to the carryforward from 2010 to 2011.

Notice # 1 addressed to Petitioner only:

Year Deficiency Section 6663 Penalty Section 6651(a)(1) Addition to Tax
2011 $350,669.00 $263,001.75 $87,167.00
2012 $444,335.00 $333,251.25 None
2013 $550,174.00 $412,630.50 None

The second notice was for tax year 2010 only, sent to both parties at Mr. Chan’s last known address (Notice # 2).  The third notice was also for 2010 and was sent to Petitioner’s last known address, but she did not timely receive it.

Notices # 2 and 3 addressed to Petitioner and Mr. Chan:

Year Deficiency Section 6663 Penalty
2010 $441,539.00 $331,154.25

Petitions Filed by Tramy Van and Denny Chan:

Docket Number Petitioner Notice Attached Filed
2435-17 Denny Chan Notice 2 1/24/17
4460-17 Tramy Van Notice 1 2/21/17
15694-18 Tramy Van Notice 2 8/9/18

As noted above, Denny Chan petitioned the Tax Court, which has led to questions about consolidation of cases.

What we are concerned with, though, is the petition by Tramy Van filed in docket number 4460-17, concerning Notice # 1.  In paragraph five and, importantly, in the attachment to the petition, she explicitly contested “all the IRS’s changes to the tax returns examined for the applicable tax years ending 2010 through 2013 for the following taxpayers:  Tramy T. Van, Tramy Beauty School [Partnership], Tramy Beauty School, Inc. [S Corp].”  She explained that she had not received a notice for 2010, but expected to receive one.

The IRS filed an answer to that petition, alleging no notice was sent to Tramy Van for tax year 2010 (basically denying sending Notice # 2 and # 3).

The next year, Tramy Van filed another petition (15694-18) based solely on tax year 2010, attaching Notice # 2, which was received from Denny Chan’s counsel.

In the 4460-17 case, the IRS filed a Motion for Leave to File Amended Answer, admitting sending the 2010 Notice to Petitioner, with an attachment of Notice # 3, arguing the Court has jurisdiction over 2010.  That same day, they filed a Motion to Consolidate Mr. Chan’s case with the 4460-17 case.  The next day, both motions were granted.

In the 15694-18 case, the IRS filed a Motion to Close on Ground of Duplication, which was later denied.  The IRS later filed a Motion to Dismiss for Lack of Jurisdiction on 1/31/19.  They attached a certified mailing list, showing Notice # 3 was mailed 11/23/16 (this document came nearly two years after the 4460-17 petition).  Since the 15694-18 petition was filed 8/9/18, the IRS motion to dismiss was granted because the petition was untimely, filed eighteen months after the 90-day period for filing the petition expired.

Turning to the analysis in this case, the 2010 notice was deemed received by Petitioner in the 15694-18 case when sent to her last known address on 11/23/16, treating Notice # 3 as a valid notice of deficiency.

Next, since Notice # 3 was sent by certified mail on 11/23/16, a petition would be timely if postmarked on or before 2/21/17.  The 4460-17 petition was filed 2/21/17, within the statutory 90-day period, making it a timely filed petition.

Is there an objective indication Tramy Van contested the 2010 determination?  In order to do so, a taxpayer must give an objective indication of contesting a deficiency determined by the IRS against the taxpayer.  The petition must be ascertainable about the issues presented and give the parties and the Court fair notice of the matters in controversy and the basis for their respective positions.

The petition states that Tramy Van contests all changes to her 2010 return concerning her as an individual and regarding her two businesses.  She states she was not in actual receipt of the notice, which is why it was not attached.  She was in receipt of Notice # 1, which has a connection from 2011 to the disallowed net operating loss carryforward disallowed from 2010.  By stating she contested the changes for years 2010 through 2013, she gave notice to the Court and the IRS that 2010 would be a matter in controversy within the petition.

The Court denied the IRS motion to dismiss for lack of jurisdiction for Tramy Van as to tax year 2010.  All other arguments raised by the parties were deemed either moot or without merit.

Takeaway:  The multiple notices and petitions have led to a good amount of confusion that needed sorting out.  It is fortunate for Tramy Van that she listed the year 2010 on her petition, plus mailed the petition in a timely fashion, or it likely would have been dismissed before the Tax Court.

What Is a Deficiency?

Docket No. 5307-19S, Rajan R. Kamath v. C.I.R., Order of Dismissal for Lack of Jurisdiction available here.

Mr. Kamath did not timely file his federal tax returns for tax years 2011, 2012, 2013 and 2015.  The IRS audited him and prepared substitute tax returns under section 6020(b) and mailed 30-day letters regarding the income tax deficiencies for the years at issue.  Mr. Kamath filed delinquent tax returns for those years, leading the IRS to process the tax returns, resulting in tax liabilities and additions to tax under sections 6201(a)(1) and 6651(a)(2).

The IRS issued a notice of deficiency for the four tax years.  There were no deficiencies in federal income tax listed, but they determined Mr. Kamath to be liable for the following additions to tax based on his delinquent tax returns:  section 6651(a)(1) [late filing] for all four tax years, section 6651(a)(2) [late payment] for tax years 2013 and 2015, section 6654 [failure to pay estimated tax] for tax years 2012, 2013, and 2015.  Mr. Kamath timely filed a petition for redetermination challenging the notice of deficiency.

In the analysis, section 6212(a) authorizes the IRS to send notices of deficiency to taxpayers.  The question is – did the IRS determine a “deficiency” within the meaning of the Code?  Section 6211(a) defines a “deficiency” as the amount by which the tax imposed by subtitle A and B, or chapters 41 to 44 of the Code, exceeds the excess of the sum of the amount shown as the tax by a taxpayer on the taxpayer’s return plus the amounts previously assessed as a deficiency, over the amount of rebates made.  Section 6665(a) states the general rule that additions to tax are treated as “tax” for purposes of assessment and collection.  Section 6665(b) provides an exception to the general rule, however, that subsection (a) shall not apply to additions of tax under sections 6651, 6654, or 6655, except for applications of 6651 additions, to the extent such addition is attributable to a deficiency in tax under section 6211, or additions described in section 6654 or 6655, if no return is filed for the taxable year.

Mr. Kamath filed delinquent federal income tax returns for the four years that the IRS assessed under 6201(a)(1).  In the Court’s review, the tax liabilities reported do not constitute income tax deficiencies under 6211(a).  Also under 6665(b), the additions to tax are not “tax” subject to the Court’s jurisdiction.  The additions to tax under 6654 are also not subject to the deficiency procedures because Mr. Kamath filed delinquent tax returns for the years in issue.  It followed that the notice of deficiency is invalid and the Tax Court is obliged to grant the IRS motion to dismiss.

The Court has some sympathy to the petitioner’s argument that it is inequitable to deny him the opportunity to petition the Tax Court.  As they have said previously, “We recognize the difficult position in which petitioners are placed by not being able to come to the Tax Court to test the validity of the respondent’s action in asserting the penalty.  Nevertheless, that is the law and we must take it as we find it.”

The Court ordered that the IRS motion to dismiss for lack of jurisdiction is granted and dismissed the case for lack of jurisdiction on the ground that the notice of deficiency is invalid.

Takeaway:  Mr. Kamath’s delinquent filing of his tax returns led to greater issues with the IRS than if he had timely filed his tax returns.  If he had not filed those tax returns late, all of the penalties would have been on the statutory notice of deficiency the IRS would have been required to send in order to assess the taxes and he could have contested them in Tax Court.  By filing the late returns, Mr. Kamath cut off his ability to contest the penalties in a pre-payment forum.  The lesson here is that a taxpayer who doesn’t file his return and now wants to contest the late filing and late payment penalties that will necessarily follow should not agree with the IRS when it proposes an IRC 6020(b) return but should instead wait for the notice of deficiency which will give him the opportunity to put on information about the tax itself and probably settle it at the same place he would have been had he filed the late returns while preserving his pre-payment right to go to Tax Court to contest the penalties.  Unless he has very unusual facts the preservation of the pre-payment right to contest the penalties may not be of much value.

Is It a Payment or a Deposit?

Docket No. 25757-18S, Albert Carnesale & Robin Carnesale v. C.I.R., Order available here.

Before we dig into the issue of deposits versus payments, I am going to provide some citations where you can read more on the subject.  One prior post in Procedurally Taxing is available here.  You can also turn to the Saltzman and Book text in ¶6.06 Advance Remittances: Deposits vs. Payments.

Originally, the IRS mailed to the petitioners a CP2000 notice, stating that they owed additional tax of $23,171 for tax year 2016, an accuracy-related penalty under IRC section 6662(a) of $4,220, and interest of $1,120, offset by a credit of $2,070.  In response, the accountant for the Carnesales sent a letter to the IRS with a check for the tax liability.  The letter stated that they agreed with the changes in tax liabilities, but requested a waiver of the tax penalty.

The IRS followed up with a notice of deficiency with the same amounts for the tax liability and accuracy-related penalty.  The Carnesales filed their petition with the Tax Court, stating that they do not contest the underlying liability but do contest the penalty.  The IRS filed a motion to dismiss for lack of jurisdiction on the ground the notice of deficiency is invalid because the Carnesales paid the tax liability before the notice of deficiency was issued to them.

The IRS argues that the remittance should be treated as a payment of tax instead of a deposit because the Carnesales failed to follow the procedures in Rev. Proc. 2005-18, 2005-1 C.B. 798, to properly designate the remittance as a deposit.

In the transcript for 2016 submitted by the IRS, the remittance is recorded as “Advance payment of tax owed”.  No assessments were entered for the tax, penalty, or interest proposed in the CP2000, leaving a credit balance in the account for the Carnesales.

Contrary to the procedures established in Rev. Proc. 2005-18, the remittance was not offset by a corresponding assessment of tax to which the “payment” relates.  The Court concludes that the IRS treated the remittances as a deposit, not a payment, and did not assess additional tax equal to the amount of the remittance before issuing the notice of deficiency.

The Court dismissed the motion to dismiss for lack of jurisdiction.  Trial is currently scheduled for January 13 in Los Angeles.

Takeaway:  While there are procedures for designating a remittance as a deposit in Rev. Proc. 20015-18, it looks like the petitioners were fortunate in how the IRS treated the remittance so the case was not dismissed for lack of jurisdiction and they can be heard at their day in court.

The Perils of Waiting on a Summary Judgment Motion: Designated Orders, October 7 – 11, 2019

It was a light week for designated orders, with only two being issued. Since one of them was a fairly perfunctory take-down of a petitioner’s argument that the Affordable Care Act is unconstitutional (here), we’ll devote the entirety of this post to the second order. And though that order itself doesn’t break any new ground, it gives us a chance to look at the confluence of two topics that frequently arise on these august pages: primarily, Collection Due Process and summary judgment.

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American Limousines, Inc. v. C.I.R., Dkt. # 4795-18L (order here)

One of the goals of my tax clinic is for students to learn how to manage deadlines and multiple clients. With regards to deadlines, I tell my students (1) if you need more time, you should tell me sooner than later, and (2) borrowing from something told me by a fellow professor, the closer you get to the deadline the better the final product better be. To me, the order in American Limousines exemplifies the perils those two pieces of advice are meant to forestall. 

The Collection Due Process (CDP) hearing in American Limousines should be about as straightforward as they get: no tricky issues about whether petitioner is precluded from arguing the underlying liability (see here, among many others), no deep dives into the record about whether a Notice of Deficiency was properly mailed (here), no questions about application of payments (here). Nope, just your typical argument between the taxpayer and the IRS about how much they can afford to pay. 

The IRS thinks that the issues have been sufficiently hammered out in the CDP hearing and there was no abuse of discretion, setting the table for its summary judgment motion.

And yet the motion is denied. And because of this, a trial is quite likely.


It didn’t have to be this way. 

Granted, there is quite a fair sum of money at issue in this case: $1,170,103 in unpaid employment taxes. The two sides are also quite far apart in their estimations of how much can be paid via an installment agreement. Petitioners proposed $2,000 a month -the most (actually more than) they say they could possibly afford. If interest rates were zero the liability would be fully paid after a mere 70 years -presumably when limousines are all self-driving. Of course, absent an explicit agreement to extend the collection statute, the IRS only has 10 years from the date the tax was assessed (see IRC 6502(a)(2)), so this plan is really a proposal to the IRS to let a lot of the debt go unpaid after the CSED stops (a “partial pay” installment agreement, in IRS parlance: see IRM 5.14.2). But hey, the IRS would get $2K a month for a while, which is better than nothing -nothing being the other proposal put forward by the petitioner (in the form of Currently Not Collectible).

The IRS isn’t opposed to the idea of an installment agreement, only on slightly different terms. Rather than $2,000 the IRS believes that an acceptable amount is in the ballpark of $22,877 a month. The difference between the two sides, it appears, mostly boils down to what should and should not be considered in the calculation of expenses and income. 

When the IRS looks at 4 months of financial statements, they believe there is money to be found. Money that can be put to back taxes. For starters, the money paid to the owner ($202,800 per year), and the somewhat artificial loss from “noncash depreciation” ($412,224 per year) could allow the company to continue to operate while paying the back taxes. Taking these numbers at face value, it would mean that petitioner has $51,252 to put towards back taxes every month. But the IRS isn’t that naive about the profitability of the limo business, so they allow an “annualized loss” of $65,953. Then, to account for “tight margins,” the IRS basically cuts in half what would otherwise be the amount of money left over each month. The result: $22,877 per month. That is the lowest they are willing to go.

But petitioner has a ready answer for this: “you forgot the $506,148 yearly principal payment I make on my fleet! And drivers tips are expenses! And limousines are a seasonable business [apparently]! And all of these are disputes about material facts, so no summary judgment!”

But is the petitioner correct? Are those the sorts of issues that can’t be addressed in a summary judgment motion in a collection due process hearing?

The IRS Motion for Summary Judgment

The IRS wanted to keep it simple in its motion for summary judgment: “Look Judge, here are the four paragraphs of reasoning Appeals provided for proposing a vastly higher monthly payment and sustaining the levy. There is no abuse of discretion in the reasoning and the outcome, so let’s just move along. Further, the Court is confined to the administrative record in reviewing the Appeals determination because of the Robinette, which should make this all-the-more summary-judgment appropriate.”

(As a side-note, potentially an important one, I couldn’t quite make-out why the IRS was arguing that Robinette applied since the case is taking place in Maryland, which would be in the 4th Circuit. As I understand it, the 4th Circuit isn’t one that follows the Robinette 8th Circuit decision. So either the IRS is mistaken that the Court should be bound by the administrative record, or they are pushing it in the hopes that they get the 4th Circuit to rule on the issue. Or, I suppose less exotically, the appellate court for American Limousines actually is one of the Robinette following circuits, and petitioners simply chose Maryland as their place of trial. See IRC 7482(b) and Les’s post here.)

The Court’s Response to the IRS Motion

One might wonder why the issues raised by petitioner in the objection to summary judgment weren’t already hammered out in the Appeals hearing, and are not therefore part of the administrative record. After all, questions about what is and is not necessary expenses seems like the very essence of what Appeals and the petitioner should have been arguing over, in a hearing that solely looked at collection alternatives.

And yet, here we are.

In the immortal words of Cool Hand Luke (actually, the Captain) what we have here is a failure to communicate. Judge Halpern refuses to grant the motion because it isn’t entirely clear what the parties’ positions really are: does the IRS object to Petitioner bringing up these installment agreement calculation arguments as being outside the administrative record? Are these arguments (and the facts relied on) outside the record? Were they properly addressed by Appeals if they were raised?

The boilerplate explanation for the purpose of summary judgment is to “expedite litigation and avoid unnecessary and expensive trials.” (Frequently, Florida Peach Corp. v. C.I.R., 90 T.C. 678 (1988)) is cited to for this proposition.) Query whether this motion for summary judgment would advance that purpose. A timeline may be helpful to see why not.

On May 30, 2019 the Court set trial for October 28, 2019. Three months later, on August 29, 2019, the IRS filed its motion for summary judgment on -essentially two months before trial. Under the Tax Court rules, this is a timely motion for summary judgment, but the absolute latest you can make it without the Court’s leave. See Tax Court Rule 121(a). One problem with such a late motion is that it doesn’t give the Court a lot of time to consider both the motion and any objection before the parties would be in Court anyway -potentially obviating the purpose of “avoiding unnecessary trials.”

And because not everything is properly sorted out in this motion (as is often the case), it makes the most sense to Judge Halpern to have the parties explain the issues at trial. This case has actually been kicking around the Tax Court docket since March 2018. After an initial remand to Appeals (on the IRS’s own motion), it was restored to the general docket more than a year ago -September 25, 2018. Then, from roughly December 2018 through the end of August, 2019, the case appears more-or-less dormant. At least from the perspective of the Tax Court docket… there is almost always other work between the parties going on beyond the scenes.

To be fair, it appears that more of the confusion in this case comes from petitioner’s objection than the IRS motion for summary judgment. Why is petitioner advocating for a $2,000 a month payment plan when they also claim they have negative cash-flow? Does the petitioner really think the error was denying Currently Not Collectible? Is the petitioner raising arguments based on what is in the administrative record? There really isn’t time to sort this out before trial would take place (roughly 2 weeks later), so continuing down the summary judgment path just doesn’t make much sense.

It is strange to me that it took the IRS this long to make the motion. Usually in CDP cases where the issue is collection, and not the underlying liability or attacks on assessment the IRS attorney’s role is essentially limited to a Summary Judgment machine. The IRM for counsel in CDP cases basically gives two instructions: (1) try to resolve the case on a pretrial motion, likely summary judgment (see esp. IRM and IRM and/or (2) file a motion to remand if it looks like Appeals isn’t giving you the record you need to succeed (see IRM

In this case, the IRS had previously filed a motion to remand, way back on May 11, 2018. I’m inferring that a supplemental notice of determination was issued late in 2018, because the Court ordered the IRS to file another answer in December. This means the table should have been set for a motion for summary judgment shortly thereafter. But because the motion wasn’t filed “sufficiently in advance of trial” (like the IRM tells its attorneys to do), it was met with rejection. 

It should be noted that in the not-too-distant past the Tax Court deadline to file a motion for summary judgment simply provided that it should be made “within such time as not to delay the trial.” (See footnote 1 for Rule 121(a).) There is reason to believe that this change came about in part because of research conducted by Keith and Carl, which raised concerns about how (needlessly) long many collection cases took to reach resolution. (See “Tax Court Collection Due Process Cases Take too Long,” 130 Tax Notes 403 (Jan. 24, 2011).)  Because the petitioner may not care about the case dragging on in levy cases (generally, their goal is simply not to pay the tax anyway), the onus is really on the IRS to make appropriate summary judgment motions as early as possible when it is clear that trial isn’t needed. There isn’t much of a reason for the government to wait in such cases, and waiting only increases the likelihood of failure for exactly the reasons present in American Limousines.

Again, as I tell my students, if you wait until the last second it better be perfect. And this motion wasn’t.

Love, Legal Fees, and the Origin of the Claim: Designated Orders September 23 – September 27, 2019

Despite a relatively small number of orders designated during the week of September 23, they were diverse and interesting. I discuss three below, but the orders not discussed addressed: IRS’s motion for summary judgment in a case where petitioner cited the book, “Cracking the Code” to support his position (here); and a motion to stay (here) and a motion to dismiss for lack of jurisdiction (here) from petitioners in a consolidated docket case involving converted partnership items.

Docket No. 15277-17, Maria G. Leslie v. C.I.R. (order here)

This first order piqued my interest because it covers a topic that comes up in the individual income tax class that I teach every year. The order addresses the IRS’s motion for summary judgment and the case involves alimony and the deduction for legal fees under section 212. The Tax Cuts and Jobs Act separately impacted both of these issues by eliminating the income inclusion (and corresponding deduction) of alimony for divorces decreed post-2019, and by suspending miscellaneous itemized deductions (so below-the-line attorney’s fees cannot currently be deducted). The analysis in this order is still helpful and relevant to past, and perhaps, future years.


A deduction for legal fees is allowed when the fees are incurred to produce or collect income. Since alimony is considered income by virtue of section 71(c) legal fees related to alimony could be deducted, prior to the TCJA changes. Legal fees related to other costs of divorce are not deductible, so it is important that taxpayers (or more importantly, their divorce attorneys) distinguish between the fees paid for each cause of action.

To determine whether the fees are deductible, the Court must look to the origin of the claim and not the taxpayer’s purpose or desired outcome in the case.

In this specific case, there is a lot at stake for the petitioner. Her ex-husband worked with the firm that handled the class action lawsuit against Enron and for which he received a $50 million fee after the marriage ended.

Originally, a marital settlement agreement (“MSA”) was reached which entitled petitioner to 10% of her ex-husband’s earnings. The amount received under the MSA was determined to be alimony income to the petitioner in an earlier Tax Court case.

Later, petitioner had second thoughts about the MSA and incurred legal fees in three separate proceedings: 1) to set aside the MSA for lack of legal capacity, 2) for an order to show cause as to why she should receive the percentage of earnings as dictated by the MSA nevertheless (her ex-husband deposited her percentage into a trust account for her benefit, but she was barred from accessing it), and 3) for damages for breach of fiduciary duty to her with respect to the MSA negotiations under California Family Code which allows a suit for damages if a breach by her ex-husband results in impairment to her undivided one-half interest in the community estate.

The Court looked to origin of the claim for each proceeding and determined that petitioner was only entitled to deduct legal fees for the second proceeding, because it related to the alimony income in the trust account and her ability to collect it. The IRS’s motion for summary judgment was denied with respect to this part.

The other proceedings were not entitled to a legal fee deduction because the origin of the claim in the first proceeding was related to a flaw in the MSA, and in the third proceeding arose from a duty that her ex-husband had to her as a result of their marriage. In other words, the origin of the first and third claims did not involve the production or collection of income. The IRS’s motion for summary judgement was granted with respect to these parts.

The parties were ordered to submit settlement documents or a status report by the end of November.

Docket No. 6446-19L, Wendell C. Robinson & May T. Jung-Robinson (order here)

In this order the petitioners have filed a motion for summary judgment because they believe they have already paid their 2012 liability of $88,000 with a combination of withholding and a check sent with their return. They argue that as a result of the liability being paid in full, and since the assessment statute is closed, the IRS’s proposed levy cannot be sustained.

In response, the IRS explains that the petitioners’ return contained mathematical errors, so they owed $13,267.20 more than what their return originally reflected. The IRS used its math error authority to correct the returns, so no notice of deficiency was issued. There has been considerable coverage by PT on various math error authority issues (for example: here and here) and it was an “Area of Focus” in former NTA, Nina Olson’s Fiscal Year 2019 Objectives Report to Congress.

The Court has an issue with the IRS’s use of math error authority in this case – mainly that Appeals’ notice of determination makes no mention of the mathematical corrections permitted by section 6213(b)(1), nor of whether the petitioners were notified of the corrections, as required, to give them an opportunity to request abatement. Abatement can be requested under section 6213(b)(2)(A) and doing so entitles the taxpayer to deficiency procedures.

The Court would like more evidence on this issue, so it denies petitioner’s motion.

Docket No. 17799-18L, Michael Balice v. C.I.R. (order here)

This case involves an interesting scenario in the CDP world that I have not encountered – it is one where a taxpayer timely requests a CDP hearing but is not provided with one. Keith covered the topic in 2015 (here), and in 2016 (here) after the IRS provided guidance on how its attorneys should handle the issue in Chief Counsel Notice (“CC”) 2016-008. The issue has also come up in at least one other designated order post (here).

In this order, it appears that Counsel may not have adhered its own guidance and the IRS has moved to dismiss the case alleging that the petitioner took only frivolous positions in his CDP requests for a levy and lien.

The IRS argues that the Court should grant summary judgment in their favor because they did not violate petitioner’s due process rights by denying him a CDP hearing. In the IRS’s view, petitioner had an opportunity to raise issues regarding his liability and the validity of the lien in other courts (because the DOJ had the case for a period of time) and petitioner’s request was properly disregarded because it only raised frivolous issues. IRS also argues that there is no benefit to remanding the case to Appeals, which the Court may be permitted to do, because of petitioner’s frivolous arguments and because Appeals lacks the authority to compromise petitioner’s liability due to the DOJ’s involvement.

The Court isn’t convinced by the IRS’s arguments and reviews the history of the case. Earlier on, as a result of the Office of Appeals’ view that the petitioner’s request was frivolous, it did not communicate with the petitioner in any of the usual ways. The petitioner did not receive an explanation of the process and Appeals did not request any financial information.

The only correspondence Appeals sent to petitioner was a notice of determination sustaining the NFTL (petitioner’s request related to his proposed levy was not timely). This denial of a CDP hearing is permitted under section 6330(g), but Thornberrypermits the Tax Court to review the “non-hearing” for an abuse of discretion.

That opportunity for review is potentially helpful for petitioner in this case. The Court reviews the form letter that petitioner submitted with his CDP request and nothing seems frivolous about it.  If only some portions of petitioner’s request are frivolous, then Appeals may have abused its discretion in denying the CDP hearing. The Court also identifies a section 6751 supervisory approval issue and the IRS has not demonstrated it has met its burden. As a result, rather than grant the IRS’s motion, the Court sets the motion for argument during the upcoming trial session.

Affidavits in Summary Judgment – Designated Orders: September 16 – 21, 2019

Only one order this week, but it’s a meaty one. Judge Halpern disposed of three pending motions from Petitioner in Martinelli v. Commissioner, a deficiency case. Let’s jump right in.


Docket  No. 4122-18, Martinelli v. C.I.R. (Order Here)

So begins the tale of the brothers Martinelli: Giorgio, the Petitioner in this Tax Court case, and Maurizio, the generous yet problem-causing sibling who—according to Giorgio—created an Italian bank account in Giorgio’s name in 2011. Giorgio argues that he never had knowledge of or control over the Italian bank account; he was a mere “nominee” on the account. He first learned of the account in September 2012.

The IRS, as one might expect, alleged that Giorgio didn’t report the income from the account on his federal income tax returns for 2011 through 2016. To boot, the IRS assessed a penalty under section 6038D(d) for failure to disclose information regarding a foreign financial assets where an individual holds foreign financial assets exceeding $50,000 in value. (NB: This penalty is distinct from the Foreign Bank Account Reporting, or FBAR, penalty found at 31 U.S.C. § 5321. Unlike the FBAR penalty, the IRS may collect the section 6038D(d) penalty using its ordinary collection mechanisms, including the federal tax lien).

Petitioner filed three motions: first, a motion for partial summary judgment to determine that the Tax Court has jurisdiction regarding the section 6038D(d) penalty; second, a motion to restrain assessment and collection of the penalty while the Tax Court case is pending; and third, a motion for partial summary judgment regarding the underlying income tax deficiency.

Jurisdictional Motion

The Court rightly held that it lacks jurisdiction as to the 6038D(d) penalty. As the Tax Court likes to repeat, it is a court of limited jurisdiction. Congress must provide the Tax Court with the authority to hear particular cases. While certain penalties fit into Congress’ grant of authority under the Tax Court’s general deficiency jurisdiction under section 6211(a) and section 6214, this penalty simply doesn’t.  

Judge Halpern reviews the Court’s jurisdiction under section 6211(a). It includes taxes imposed under subtitle A or B, or under chapters 41, 42, 43, or 44. But section 6038D is in Chapter 61 of subtitle F. So no luck there.

Likewise, the penalty isn’t an “additional amount” under section 6214. Tax Court precedent has confined this jurisdictional grant to penalties under subchapter A of chapter 68. See Whistleblower 22716-13W v. Commissioner, 146 TC 84, 93-95 (2016). Failing to find a jurisdictional hook, the Court denies summary judgment on this matter, holding that the Court does not have jurisdiction with respect to this penalty.

Is this the right result as a policy matter? I think not. The IRS likely assessed this penalty during the audit of Mr. Martinelli’s tax return, in addition to the deficiency it proposed. One result of the audit is subject to challenge in the U.S. Tax Court; the other isn’t. Yet a challenge to both may rely on the same set of facts. Why require a taxpayer to litigate twice?

Motion to Restrain Assessment & Collection

The Court’s disposition of the first motion makes the second easy. If the Court can’t determine the amount of the penalty, it certainly can’t tell the IRS not to collect the penalty. This motion is likewise denied.

The Deficiency

Giorgio alleges that he was a mere “nominee” of the account, and that in fact, his brother Maurizio controlled the account. Thus, Giorgio shouldn’t be subject to tax on the interest and dividend income from the account.

Judge Halpern takes issue with the nominee argument. He notes that a nominee analysis doesn’t really fit here; that analysis is usually used to determine whether a transferor of property remains its beneficial owner. Here, the parties disagree on whether Maurizio used his own assets to fund account and then listed Giorgio as the nominee owner. This analysis would allow the Court to determine whether Maurizio had an income tax liability, but would only allow a negative implication as to Giorgio.

Instead, the Court focuses on whether Giorgio exercised sufficient dominion and control over the account. The Court asks whether Giorgio had freedom to use funds at his will. While Petitioner did submit affidavits from himself and Maurizio, there was no other evidence to show that Petitioner didn’t enjoy the typical rights of an account owner (i.e., the right to access funds in the account). So, it appears there’s still a genuine dispute of material fact regarding Giorgio’s ability to access these funds.  

Judge Halpern did, however, allow for the possibility that Giorgio didn’t have any knowledge of the account until after 2011. After all, one can’t withdraw funds from an account that remains secret from the nominal owner. Giorgio says that he didn’t have knowledge until September 2012.

Here’s where we enter a problem for the typical analysis of a motion for summary judgment. Petitioner provided an affidavit that he had no knowledge of the account until September 2012. Respondent denied this, but didn’t provide any other evidence showing that Giorgio did, in fact, have this knowledge. Under Rule 121(d), Respondent can’t rest on mere denials in response to a motion for summary judgment; instead, a party “must set forth specific facts showing that there is a genuine dispute for trial.”  

What’s Respondent to do? There may be no evidence demonstrably showing that Giorgio knew about the account. The only evidence is Giorgio and Maurizio’s affidavit.

Rule 121(e) provides a safety valve: if a “party’s only legally available method of contravening the facts set forth in the affidavits or declarations of the moving party is through cross-examination of such affiants or declarants . . . then such a showing may be deemed sufficient to establish that the facts set forth in such supporting affidavits or declarations are genuinely disputed.” In other words, Petitioner can’t simply provide an affidavit and rest on his laurels. Respondent must have an opportunity to cross-examine the affiant—in this case, Petitioner and his brother.

Thus, because Respondent showed under Rule 121(e) that they had no other way to refute the facts alleged in Petitioner’s affidavits, the knowledge issue is a genuinely disputed material fact for 2011. Whether petitioner controlled and could withdraw funds from the account is likewise a genuinely disputed material fact for the other tax years. As such, Judge Halpern denies Petitioner’s motion for summary judgment.

The case is now set for trial on February 10, 2020 in New York.  

Tax Protesting and 6673 Penalties: Designated Orders 9/2/19 to 9/6/19

There was one sole designated order for the week I monitored the Tax Court in September. It deals with a tax protestor who is a frequent flier with the Tax Court. How did he fare? Find out below. Following that, we provide a survey of section 6673 penalty cases in the Tax Court.

Tax Protesting
Docket No. 17872-18L, Alexander H. Hyatt v. C.I.R., Order and Decision available here.

The petition filed concerns a notice of determination sustaining a proposed levy to collect on unpaid tax liability for 2012. The IRS filed a motion for summary judgment with a declaration in support. The Court ordered Mr. Hyatt to file a response to the motion on the same day. In the Court’s order, they cautioned Mr. Hyatt that his frivolous arguments raised in the petition could be subject to the imposition of a section 6673 penalty of up to $25,000.

Previously, Mr. Hyatt had filed a petition with the Tax Court concerning the notice of deficiency of $39,414 on the 2012 tax year. He filed an imperfect petition and the Court ordered him to file an amended petition and pay the filing fee. Since he failed to do that, the petition was dismissed for lack of jurisdiction.


In response to a notice of intent to levy the unpaid 2012 tax liability, Mr. Hyatt filed for a collection due process hearing. However, his arguments were that no contract exists between the parties, the tax was fraudulently assessed, he objects to the United States financial system, objects to his status as a citizen of the United States, objects to the Social Security system, and desires to rescind his signature on all IRS Forms 1040 he filed because he believes he is no longer legally required to file such forms.

In the collection due process hearing, the settlement officer verified that all procedural and administrative requirements were met. Mr. Hyatt could not challenge the underlying tax liability because of his previous failed petition to the Tax Court. He informed the settlement officer he was not seeking a collection alternative. The settlement officer determined that the proposed levy was appropriate and the IRS issued the notice of determination.

With the current petition, Mr. Hyatt asserts there is no legal authority (statutory, regulatory, or otherwise) that authorizes the notice of deficiency, the IRS fraudulently manipulated its internal systems, and no regulation imposes a tax liability on wages. He also made the other arguments listed above. He did not respond to the IRS motion for summary judgment.

As an aside, I recommend reading (or skimming) the IRS statements regarding tax protesters. The official title is “The Truth About Frivolous Tax Arguments”, available starting here, or in a 73-page PDF here. It is fascinating reading into the world of tax protests. Truly, this group has come up with creative arguments regarding why the federal tax system does not apply to them and why they should not pay their share of taxes.

The official IRS position is that these are frivolous tax arguments. Accordingly, those frivolous tax arguments can lead to hefty penalties. By the way, that sentence is what is known as foreshadowing.

Back to the Tax Court – the Court analyzes the collection due process hearing. Looking at the facts above concerning the settlement officer’s actions, the Court finds there was no abuse of discretion for sustaining the proposed levy.

The Court reviewed Mr. Hyatt’s arguments and concludes they are frivolous and without any basis in law or fact. As a result, the Court determines that summary judgment is appropriate and grants the IRS motion.

Finally, the Court reviews the authority to impose a penalty not exceeding $25,000 under IRC section 6673(a)(1). Now, until this point, I was thinking that this was an average tax protestor case and it would not necessarily be worth reporting on.

However, Mr. Hyatt is a repeat offender at the Tax Court. You can see how each judge leaves hints for the next judge regarding future treatment of such an offender:

• In docket # 7221-07L, the Tax Court imposed a $5,000 penalty – Judge Kroupa first states, “Petitioner deserves a penalty under section 6673(a)(1), and that penalty should be substantial, if it is to have the desired deterrent effect.” Later, “We are also convinced that petitioner is aware of the warnings this Court has given to taxpayers who provide the type of arguments petitioner provided in this case yet petitioner persisted and wasted this Court’s limited time and resources.” After applying the penalty – “In addition, we take this opportunity to admonish petitioner that the Court will consider imposing a larger penalty if petitioner returns to the Court and advances similar arguments in the future.”

• In docket # 26157-08, a $7,500 penalty – From the bench opinion transcript of the hearing (where Mr. Hyatt did not appear) with Special Trial Judge Armen: “The record in this case convinces us that petitioner was not interested in disputing the merits of the deficiency in income tax determined by respondent in the notice of deficiency. Rather, the record demonstrates that petitioner regards this case as a vehicle to protest the tax laws of this country and espouse his own misguided views. We are also convinced that petitioner instituted and maintained this proceeding primarily, if not exclusively, for purposes of delay. Having to deal with this matter wasted the Court’s time, as well as respondent’s. Moveover, taxpayers with genuine controversies may have been delayed. Many years ago, Supreme Court Justice Oliver Wendell Holmes said: ‘Taxes are what we pay for civilized society.’ Petitioner undoubtedly feels himself to be entitled to every benefit that civilized society has to offer; unfortunately, he feels no obligation to pay his fair share. [Regarding the previous penalty,] Petitioner remains undeterred.”

• In docket # 8771-08L, a $10,000 penalty – Mr. Hyatt is before Special Trial Judge Armen again, this time appearing with the same Respondent’s counsel from the last case. Judge Armen reuses a good amount of the language above in another bench opinion transcript. “In view of the foregoing, and as Petitioner remains undeterred, he deserves a significant penalty under section 6673(a). Accordingly, we shall grant that part of Respondent’s motion requesting a sanction and impose a penalty on Petitioner in the amount of $10,000.”

• In docket # 22711-09L, a maximum penalty of $25,000 – This time, it is a bench opinion transcript from a trial before Judge Halpern. “We are convinced that Petitioner has no legitimate grounds for challenging the notice. Rather, Petitioner’s arguments in this case and Petitioner’s previous appearances before this Court demonstrate that Petitioner regards this case as a vehicle to protest the tax laws of this country and espouse his own misguided views. Based on well-established law, Petitioner’s position is frivolous and groundless. We are also convinced that Petitioner instituted and maintained this proceeding primarily, if not exclusively, for purposes of delay. Having to deal with this matter wasted the Court’s tie, as well as Respondent’s.” Regarding the prior penalties – “Petitioner has not been deterred, and we think it appropriate to penalize him to the maximum extent possible. We therefore shall impose on him a 6673(a)(1) penalty of $25,000.”

In this case, the Court states that Mr. Hyatt has not been deterred from maintaining frivolous positions. He advanced frivolous arguments that serve no purpose other than to protest the tax system and delay the collection of his owed taxes, wasting resources of the Court and the IRS. Because of those reasons, the Court again imposed the maximum penalty of $25,000.

Takeaway: See a pattern? Tax protesting is not profitable in Tax Court. I do not advise it. Find better creative outlets than upsetting the Tax Court.

We may never know how many fees the IRS collects from Mr. Hyatt. Keith mentioned that it would be an interesting CDP case in Tax Court regarding the collection of 6673 fines.

§ 6673 Penalty Tax Court Cases

Keith thought it would be worthwhile to survey 6673 penalty cases with the Tax Court using the order function on the website. It is possible that some 6673 cases were decided by opinion and not by order so this list may not be all inclusive. Keith asked his research assistant to run a search using the order function which is one of the best features of the Court’s website. Here, we have a list of the 6673 penalties imposed by judges during years 2011 through 2019. There were 173 penalties imposed during this period. Keith is using the information to write an article in a forthcoming edition of the Journal of Tax Practice and Procedure. Look for more details in that article and a breakdown of penalties imposed by year.

Cases by Judge:
– Judge Armen: 6 cases
– Judge Buch: 2 cases
– Judge Carluzzo: 32 cases
– Judge Colvin: 2 cases
– Judge Copeland: 1 case
– Judge Foley: 58 cases
– Judge Gale: 1 case
– Judge Gustafson: 8 cases
– Judge Guy: 10 cases
– Judge Halpern: 2 cases
– Judge Holmes: 2 cases
– Judge Kerrigan: 1 case
– Judge Leyden: 2 cases
– Judge Marvel: 8 cases
– Judge Morrison: 4 cases
– Judge Nega: 11 cases
– Judge Panuthos: 3 cases
– Judge Paris: 4 cases
– Judge Pugh: 4 cases
– Judge Ruwe: 1 case
– Judge Thornton: 10 cases
– Judge Wherry: 1 case

My main comments are that Judges Carluzzo and Foley are the top two judges with 6673 penalty cases. However, Judge Carluzzo stopped after 2016. Chief Judge Foley picked up the slack in 2018. As Chief Judge, he is setting a new standard for the imposition of this penalty. It’s possible we are seeing a shift in the approach of the court to imposing the penalty but it’s also interesting to note how many Tax Court judges have never imposed the 6673 penalty.

The Difference between Proposed and Determined, Designated Orders August 26 – August 30

Four orders were designated during the week of August 26, including a bench opinion in favor of petitioners in Cross Refined Coal, LLC, et. al v. C.I.R. which is summarized at the end of this post. The only order not discussed found no abuse of discretion in the IRS’s determination not to withdraw a lien (order here).

Docket No. 1312-16, Sheila Ann Smith v. C.I.R. (order here)

First is another attempted development in the ever-expanding universe that is section 6751(b)(1). Petitioner moves to compel discovery related to section 6751 supervisory approval for the section 6702 penalties asserted against her while the Court’s decision is pending.

The Court first explains that some district courts have incorrectly held that the 6702 penalty is automatically calculated through electronic means, and thus, does not require supervisory approval. This is incorrect, because although the penalty is easily calculated since it is a flat $5,000 per frivolous return, it still requires supervisory approval pursuant to IRM section

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Since the penalty requires supervisory approval and the record already contains some proof of approval, the Court goes on to evaluate the timing at issue (and whether additional discovery is warranted) in this case by looking to Kestin v. Commissioner, 153 T.C. No. 2, which it decided at the end of August. Like petitioner’s case, in Kestin, a section 6702 penalty for filing a frivolous tax return was at issue and a Letter 3176C was sent to the taxpayer warning of the imposition of the penalty. The Court held a Letter 3176C is not an “initial determination” of penalty for purposes of section 6751(b)(1), so approval is not required prior to the letter being sent.

This is an unsurprising result. The letter warns the taxpayer that the penalty may be imposed, but also provides the taxpayer with an opportunity to withdraw and correct their frivolous return to avoid the penalty. By providing a taxpayer with an opportunity to act to avoid the penalty, the letter does not need the protection afforded by the section 6751(b) approval requirement. Supervisory approval is required when there is a determination of a penalty, rather than “an indication of a possibility that such a liability will be proposed,” like the Letter 3176C.

The Court denies petitioner’s motion as moot, since the evidence she seeks to compel is already in the record showing that section 6751 approval was timely obtained after the issuance of the Letter 3176C.

Docket No. 26734-14, Daniel R. Doyle and Lynn A. Doyle (order here)

In this designated order, petitioners move the Court to reconsider its decision about whether they can deduct the legal expenses they paid in settlement of a discrimination suit. Unfortunately, petitioners didn’t make this argument during their trial. They had originally argued the expenses were related to petitioner husband’s consulting business, but the fees were not related to his business because they were for a suit against his former employer.

The Court denies petitioners’ motion to reconsider because they are raising a new legal theory that is not supported by the record and they did not allege new evidence, fraud, nor newly voided judgments which would allow the Court to vacate and revise its decision under Fed. R. Civ. P. 60(b).

Docket No. 19502-17, Cross Refined Coal, LLC, et. al. v. C.I.R. (order and opinion here)

Petitioners are victorious in Cross Refined Coal – a case involving a partnership in the coal refining industry and the section 45 credits. The section 45 credits are for refined coal that is produced and sold to an unrelated party in 10 years, subject to certain requirements. The bench opinion consists of 24 pages of findings of fact and 22 pages of legal analysis, so I only highlight some aspects here.

The IRS’s main issue is whether the partnership was a bona fide partnership under the Culbertson test and Tax Court’s Luna test. The IRS had an issue with two (of the eight) factors in Luna which help establish whether there was a business purpose intent to form a partnership.

First, the IRS posits that the contributions the parties made to the venture were not substantial, even though the partners made multi-million dollar contributions of their initial purchase price and to fund ongoing operating expenses. The Court disagrees and points out that the contributions are not required to meet any objective standard, the partners’ initial investments were at risk, and they continued to make contributions to fund operating expenses even when the tax credits were not being generated.

Second, the IRS argues that the partners did not meaningfully in share profits and losses, because the arrangement should justify itself in pre-tax terms in order to be respected for tax purposes. Disagreeing with the IRS, the Court finds petitioners shared in profits and losses, even though the arrangement resulted in net losses because the credit amounts increased as the profits increased.

The IRS also argues that partners shared no risk of loss because the partners joined the partnership after the coal refining facility had been established. The Court points out that the IRS’s own Notice 2010-54 allows for lessees of coal refining operations to receive tax credits. The Court also distinguishes this case from a Third Circuit decision, Historic Boardwalk v. CIR, 694 F.3d 425 (3rd Cir. 2012), rev’g 136 T.C. 1 (2011), where the Court held there was no risk of loss when taxpayer became a partner after a rehabilitation project had already begun. Historic Boardwalk, however, dealt with investment credits. The credits at issue in this case are production credits, so what the IRS argues is the “11th hour” (because the coal refining facility had already been established) is actually the first hour because it is the production of coal that generates the credit, rather than the establishment of the facility.  

An overarching theme in the IRS’s position is that the existence of the credits make it less likely that the partners had a true business purpose, and the Court should find abuse when a deal is undertaken only for tax benefits. The Court responds to this argument at multiple points in the opinion explaining that the congressional purpose behind section 45 credits is to incentivize participation in the coal industry, an industry that no one would participate in otherwise. As a result, the credits should not be subject to a substance over form analysis in the way that the IRS seeks.

I encourage those interested in more detailed aspects of the analysis to read the opinion itself, but overall, this seems like the correct result for petitioners.