Incapacitation, Death and the End of an Era, Designated Orders November 16 – 21, 2020, Part II

The week of November 16, 2020 was the week preceding Thanksgiving and the Tax Court’s transition to Dawson was looming, which meant orders would no longer be “designated” on a daily basis. The judges knew it may be one of their last opportunities to alert the public (and Procedurally Taxing) to an order. Many lengthy, novel and diverse orders were designated. As a result, my week in November warranted two parts, and this second part is my last post on designated orders ever. I’ve learned a lot over the last three and a half years, and I hope you all have too.

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Answering Interrogatories while Incapacitated

In consolidated Docket No. 26812-12, 29644-12, 26052-13, 27243-15, 5314-16, 5315-16, 5136-16, 5318-16, Deerco, Inc., et al. v. CIR, the case involves the acquisition of a corporation and the subsequent removal of substantial plan assets (over $24 million) from the acquired corporation’s pension plan in 2008.

The petitioner who is the focus of this order was the President of the acquiring corporation and the trustee for the pension plan of the acquired corporation in control of the disposition of assets, so naturally, the IRS is very interested in what he has to say. Unfortunately, he is incapacitated. His counsel answered some of the IRS’s interrogatories on behalf of all the petitioners (individuals and entities) in this consolidated case by stating that they lack information or knowledge.

The IRS and Court find petitioners’ counsel’s answers to be insufficient for a couple reasons:

1) Rule 71(b) requires the answering party to make reasonable inquiry and ascertain readily available information. A party cannot simply state they lack the information without explaining the efforts they have made to obtain the information. Even though the petitioner is incapable of responding, the Court thinks he should have documents or records that would enable his counsel to answer the substance of the interrogatories. Petitioner also had an attorney and accountant assisting him during the transaction at issue, and those individuals may have useful information, documents, or records.

2) The Court also finds the answers are procedurally defective. The procedures, found in Rule 71(c), differ depending on whether an individual or an entity is providing the answer. In this case, petitioners’ counsel has signed under oath the answers on behalf of all petitioners. Counsel is permitted to answer and sign under oath for entities, but not for individuals. Individuals must sign and swear under oath themselves. The petitioner in this case can’t do that, but his wife has been appointed as his guardian, so she can.

There are other issues raised (such attorney-client privilege concerns), but the prevailing message is that the Court thinks petitioner’s counsel can do better and outlines the ways in which they can provide more adequate answers.

We Cannot See A Transferee

In consolidated Docket No. 19035-13, 19036-13, 19037-13, 19038-13, 19058-13, 19171-13, 19232-13, 19237-13,  Liao, Transferees, et al. v. CIR, the IRS tries several avenues to prove that petitioners, who consist of the estate and heirs of a taxpayer who owned a holding company, called Carnes Oil, should be liable as transferees when an acquisition company ultimately sold the company’s assets and tried to use a tax shelter to offset the capital gains.

In this case, initially, a company called MidCoast offered to buy Carnes Oil’s shares. MidCoast has a history of facilitating a tax shelter known as an “intermediary transaction.” In another post for PT (here), Marilyn Ames covers a Sixth Circuit decision in Hawk, which involved MidCoast, intermediary transactions, and some implications under section 6901. In Hawk, the Court affirmed the Tax Court’s decision and held that petitioners’ lack of intent or knowledge cannot shield them from transferee liability when the substance of the transaction supports such a finding.

In this case, petitioners have moved for summary judgment, and their lack of knowledge is one of the factors the Court uses to ultimately determine petitioners should not be held liable as transferees. Petitioners’ case is distinguishable from Hawk, because the Court determines, in substance, the transaction was a real sale.  

Petitioners didn’t accept MidCoast’s offer, but instead accepted an offer from another company called ASI. More details are fleshed out below, but long story short- the IRS argues an “intermediary transaction” occurred. In support of this the IRS insists that the economic substance doctrine (a question of law) and substance over form analysis (a question of fact) show that what looked like a sale of stock for money was really the sale of Carnes Oil’s assets followed by a liquidating distribution directly from the company to petitioners. The IRS seeks to reclassify the estate and heirs from sellers to transferees to hold them liable.

Even viewing the facts in a light most favorable to the IRS, the Court disagrees under both analyses. The heirs reside in different states, so the appellate jurisdiction varies. The Court acknowledges that they may have to contend with subtle conflicts among the jurisdictions, but regardless of the jurisdiction, whether a transaction has economic substance requires a close examination of the facts.

The facts show that when petitioners sold their stock the company still had non-cash assets, and those assets weren’t liquidated until after ASI controlled it. Petitioners also weren’t shareholders of the dissolved corporation, because it continued to exist for over a year after they sold it.

The facts are not clear as to where ASI got the money to pay petitioners, but after tracing the funds from relevant bank accounts, the Court determined it did not come from Carnes Oil, or a loan secured by their shares.

Neither the petitioners nor their advisers had actual knowledge of what ASI was planning to do. The IRS says there were red flags and petitioners should have known, but the Court finds Carnes Oil was a family company using local lawyers in a small town, and the shareholders reasonably accepted the highest bid.

It was a real sale. The company got an asset-rich corporation and petitioners got cash. The Court grants petitioners’ motion for summary judgment – a win for petitioners in an increasingly pro-IRS realm.

Gone and Abandoned

In Docket No. 23676-18, Miller v. CIR, the Court dismisses a deceased petitioner’s case for lack of prosecution despite his wife being appointed as his personal representative. Petitioner died less than a month after petitioning the Tax Court in 2018 and after some digging the IRS found information about petitioner’s wife.

The Court reached out to her and warned that if she failed to respond the case was at risk of being dismissed with a decision entered in respondent’s favor. The Court did not receive a response.

Rule 63(a) governs when a petitioner dies and allows the Court to order a substitution of the proper parties. Local law determines who can be a substitute. The Court’s jurisdiction continues when someone is deceased, but someone must be lawfully authorized to act on behalf of the estate. If no one steps up the prosecution of the case is deemed to be abandoned.

The Court finds petitioner is liable for the deficiency amount, but it’s not a total loss for the estate, because IRS can’t prove they complied with section 6751(b) so the proposed accuracy-related penalty is not sustained.

All’s Fair in Love and SNOD

In consolidated Docket No. 7671-17 and 10878-16, Roman et. al. v. CIR, a pro se married couple with separate, but consolidated Tax Court matters moves the Court to reconsider its decision to deny petitioners’ earlier motions to dismiss for lack of jurisdiction. The motions were disposed of by bench opinion.

The Court reviews the record and determines that petitioner made objections that have yet to be ruled on.

First, however, it explains that there are two procedural reasons for why petitioner motions could be denied. Petitioners filed the present motion under Rule 183, but that rule only applies to cases tried before a Special Trial Judge. Petitioners in this case have not yet had a trial, the bench opinion only exists to dispose of petitioners’ motions to dismiss, so Rule 183 is not applicable. Additionally, the motions for reconsideration were filed more than 30 days after the petitioners received the transcripts in their case, so they were not timely under rule 161.

Even though the motions could be denied for those reasons, the Court goes on to consider the merits of petitioners’ arguments.

Petitioners’ argue that the Court lacks jurisdiction because their notices of deficiency were invalid because they were not issued under Secretary’s authority as required by section 6212(a).   

Petitioner wife argues her notice of deficiency is invalid because it originated from an Automated Underreported (AUR) department and was issued by a computer system, which is not a under a permissible delegation of the Secretary’s authority.  

Petitioner husband’s notice of deficiency was issued by a Revenue Agent Reviewers about a year later. He argues that his notice is invalid because the person who signed the notice was not named on the notice and she did not have delegated authority to issue the notice. The IRS was not sure who issued the notice, but there were three possibilities. Petitioner husband says not knowing who specifically issued the notice constitutes fraud.

After reviewing the code, regulations, extensive case law, and the Internal Revenue Manual the Court concludes both notices were issued under permissible delegations of the Secretary’s authority and the case can proceed to trial.

Orders not discussed:

  • In Docket No. 25660-17, Belmont Interests, Inc. v. CIR, the Court needs more information from the IRS about how it plans to use the exhibits which petitioner wants deemed inadmissible. According to IRS, the exhibits support the duty of consistency related to representations made by petitioner. Petitioner states the exhibits include representations made in negotiations directed toward the resolution of prior cases involving the same or very similar issues and the F.R.E. 408(a) bars their admission.  
  • Docket No. 10204-19, Spagnoletti v. CIR (order here) petitioner moves to vacate or revise the decision in his CDP case based on arguments made in the original opinion which the Court found were not raised during in the CDP hearing nor supported by the record, so the Court denies the motion.
  • Docket No. 11183-19, Bright v. CIR and Docket No. 18783-19, Williams v. CIR, two bench opinions in which petitioners were denied work-related deductions primarily due to lack of proper proof.  

Contracts and the Court, Designated Orders November 16 – 21, 2020, Part I

Changes made during transition to the Tax Court’s new website prevent us from easily linking to the orders discussed in this post, but if you are interested in seeing an order you can search the case’s docket number on the Court’s website to find it.

Almost every area of law requires some knowledge of the tax code, especially contract law, and many of the orders designated during the week of November 16th demonstrate that. Summary judgment is not appropriate when a genuine dispute of a material fact exists, so can a genuine dispute exist when a case involves a legal writing, such as contract, deed, or agreement? The validity of the legal writing is not being questioned in any of these cases, but the Court reviews the legal writings to determine whether summary judgment is appropriate.

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Conservation Easement Deeds

The Court has been reviewing conservation easement deeds for perpetuity requirement violations for a while now and has been consistently granting summary judgment in favor of respondent. But the tides may be changing, in Docket No. 20849-17, St. Andrews Plantation, LLC v. CIR, the Court denies respondent’s summary judgment motion on this issue.

As we’ve seen and blogged about before, the deed in this case contains the “forbidden language” which fails to guarantee the donee its proportionate share of proceeds if the conservation easement is extinguished. This violates the perpetuity requirement and causes the donor organization to lose its charitable contribution deduction. For background information the posts here and here are most helpful.

So why isn’t this case another slam-dunk for respondent? According to the Court, “the deed in this case is different than the deeds in other cases,” because the “deeds in other cases contemplated future improvements that had obvious value.”

The language in the deed at issue in this case only permits maintenance of existing modest improvements, which consist entirely of a forest paths, gravel and other permeable-base roads, drainage ditches, and a metal entrance gate.

Unlike the more elaborate improvement possibilities in other cases (such as, natural gas wells, cell phone towers and additional structures) the options available in the deed in this case could not increase the fair market value of the subject property, or any increase would be de minimis. As a result, the improvements clause would not necessarily cause the donee organization to receive less than its proportionate share of proceeds in the event the property was sold following judicial extinguishment of the easement.

In Docket No. 14179-17, 901 South Broadway Limited Partnership, Standard Development, LLC v. CIR. The Court reviews the language of a deed for a façade easement and denies the IRS’s summary judgment motion while taking petitioner’s motion under consideration.

A façade easement it involves a different analysis for when it has a conservation purpose which is found in section 170(h)(4)(B) and requires that the building be listed in the National Register or be certified as having historic significance. Further section 170(h)(4)(C)(ii) requires non-National Register buildings to meet two additional requirements regarding preservation of the building’s exterior and “prohibits any change in the exterior of the building which is inconsistent with [its] historical character…”

Respondent argues that language in the deed related to the second additional requirement violates the perpetuity requirement. The deed requires the grantor to obtain prior express written approval from the grantee before it can make any changes to the building’s exterior, however, if the grantee fails respond to the request within 30 days the request is deemed approved (the “deemed approval provision”). Respondent argues that this means the grantor can make changes inconsistent with the building’s historical character if the grantee fails to respond.

But in a later section of the deed, the grantor is specifically prohibited from making any changes inconsistent the building’s historical character (the “prohibition provision”).

Both petitioner and respondent make arguments based on the deed’s construction, conflicting clauses, and the effect under California law, but the Court steps in to say none of that is necessary. The Court does not see any conflict between the deemed approval provision and the prohibition provision, because the prohibition provision limits both parties from permitting or making changes that are inconsistent with the building’s historical character so the grantee cannot be deemed to approve any request which it lacks the authority to approve.

Another order was designated in this case asking questions of respondent and setting a pre-trial conference for January 6, 2021. During the conference, IRS conveyed that they have abandoned the argument that the deed violates the perpetuity requirement argument, but they identified new issues under section 170(f) which the parties are working to resolve. 

Divorce and Separation Agreements

In Docket No. 13901-17, Redleaf v. CIR, the Court had to review the language in a divorce agreement to determine whether allocations made to petitioner were alimony or property settlements. Although the Court outlined the steps it must take when reviewing divorce agreements for characterization questions, the language in the agreement itself (referring to the allocations as “property settlement,” “division of assets,” “property division,” etc.) influenced the Court’s decision to grant summary judgment to petitioner.

In Docket No. 20452-18S, Valente v. CIR, the Court to review the terms of a separation agreement to determine whether payments made to petitioner were alimony or child support. In this case, an enrolled agent either didn’t understand, or didn’t follow, the separation agreement’s terms when he prepared petitioner’s tax return and treated a portion of what should have been alimony as child support because it produced a better result for her children’s college financial aid application. The Court determined there was nothing in the language of the separation agreement that would have allowed the alimony payments to be treated as child support payments and decided for respondent.

Contracts related to Research and Experimentation Credits

In Docket No. 7805-16, Meyer, Borgman & Johnson, Inc. v. CIR, the Court looks petitioner’s contracts to determine whether research was “funded” as defined in section 41(d)(4)(H). If the research was funded by petitioner’s clients, then petitioner is ineligible for the research credit.

The regulations instruct that “all agreements (not only research contracts) entered into between the taxpayers performing the research and other persons shall be considered in determine the extent to which research is funded,” and “amounts payable under any agreement that are contingent on the success of the research and thus considered to be paid for the product or result of the research are not treated as funding.”

The Court entertains many of petitioner’s arguments, but ultimately looks to the contracts and finds that none of them expressly make payments contingent on the success of petitioner’s research. Use of express terms have been identified as important in the case law that exists in this area. As a result, it finds there are no genuine issues of material fact and grants summary judgment to respondent.

The designated order in Consolidated Docket No. 27268-13, 27390-13, 27371-13, 27373-13, 27374-13, 27375-13, Tangle, et. al. v. CIR, also involved the research credit, but for the question of whether the qualified research tests were met and Section 41 exclusions avoided. Since it didn’t involve a contract, I don’t discuss it in detail.

Other Orders Not Discussed

There were three orders designated during the week of October 19-23, 2020:

Docket No. 2018-17L, Means v. CIR, petitioner’s case for very old tax years was dismissed after a lengthy history of non-compliance with Court orders.

Docket No. 25934-17, Tobin v. CIR, the Court grants IRS’s protective order requesting that they not be required to respond to petitioner’s request for admissions which perpetuate frivolous arguments.  

Docket No. 19697, Kalivas v. CIR, the Court denies petitioner’s motion for leave to file an amendment to petition because he failed to comply with the Court’s order, rules and more.

Making All Your Arguments in Collection Due Process Cases. Designated Orders, August 10 – 14, 2020 (Part Three)

The first two installments of this trilogy covered arguments that you are likely to raise in the hearing itself (the underlying liability), then moved to issues you might not be aware of until after the notice of determination is issued (procedural defects in assessment, or at least defects in the Appeals Officer verifying that the “applicable law or administrative procedures have been met.” IRC § 6330(c)(1). We end with an issue that is really only relevant after the hearing and in litigation: the record the Court will be able to review.

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Issue Three: The Administrative Record is Incomplete (Mitich v. C.I.R., Dkt. # 4489-19W (here))

Full disclosure: this order is not a CDP case (it’s a whistleblower case). But the admin record is critical for CDP cases. (And whistleblower cases. And innocent spouse cases.) So questions on the completeness of the administrative record are worth focusing on.

In cases where the reviewing court is confined to the administrative record, the agency is the party that submits that record. But that doesn’t mean the agency gets to dictate everything that is or should be in it. Still, the agency does have a fair amount of control over that record. And perhaps (though perhaps not -more on that later) the agency has even more control over what constitutes the administrative record in the first place when they promulgate regulations specifically defining the contents of administrative record.

It just so happens that whistleblower cases (like CDP cases) have a regulation on point for what comprises the administrative record. For whistleblower cases, the regulation is at Treas. Reg. § 301.7623-3(e) which provides in relevant part that the administrative record is comprised of “all information contained in the administrative claim file that is relevant to the award determination and not protected by one or more common law or statutory privileges.” In turn, the “administrative claim file” includes pretty much everything the Whistleblower Office reviews, as well as a final, catch-all category of all “other information considered by the official making the award determination.”

In the Mitich order, the whistleblower-petitioner thinks the tax return of the person they “blew the whistle” on should be in the administrative record. The IRS thinks that the return is not part of the administrative record, because the return was “not considered” in denying the whistleblower’s request. That may appear to be something of a head-scratcher, because in this instance the IRS clearly looked at the return (and the whistleblower’s information pertaining to it) before deciding not to pursue the tip. Indeed, the initial notes recommending denying pursuing the tip state “Rejecting claim as speculative after reviewing the taxpayers returns.” [emphasis added.]

There is nuance to the IRS’s position, however. The IRS argues that the official making the award determination didn’t rely on the return but rather relied on the initial employee (the “classifier”). Yes, the classifier relied on the return, but the classifier isn’t the official that made the determination, and in this case isn’t even a member of the IRS Whistleblower Office.

Judge Halpern isn’t entirely sold on that rationale, which leads to this order: that the parties provide a legal memo on why the return is or is not a part of the administrative record. This isn’t the first time the Tax Court has grappled with these sorts of issues. I was reminded of a previous order I covered in Whistleblower 6388-17W v. C.I.R. There, Judge Guy assigned extra homework to the parties (again, legal memos) on the tensions between IRC § 6103 and the parties’ (specifically, the whistleblowers) need to see the administrative file. Obviously, the IRS does not want to disclose any protected, confidential information, which may also provide some reason for them pushing so hard on why the tax return is not part of the administrative record here.

In any event, I somewhat doubt that whether the return is part of the record will have any bearing on Ms. Mitich getting any money. If the IRS never acted on her tip, and no proceeds were ever recovered, I am at a loss for how the tax returns help her. Yet looking at the order more broadly one can draw some other important lessons relevant beyond just the whistleblower context.

And this is where I return to the question, teased earlier: how much (legal) control does an agency have to restrict the administrative record? Because judicial review of whistleblower cases is limited by the “record rule,” exactly what the administrative record is and contains carries great importance. Two issues come to mind on that.

First, there is the issue of what should be in the record when both parties agree on the types of information that comprise the record rule but disagree on the contents. When problems arise under this category, the dispute is usually about the “completeness” of the record, and not the sorts of things that properly should be in it. For example, if both parties agree that all communications between the taxpayer and Appeals should be part of the record but a fax that the taxpayer sent to Appeals is not included, that would be an argument about completeness. This can be more fraught than it would otherwise appear.

One reason for discord is that the agency is generally the custodian of the administrative record. Taxpayers should be vigilant and keep their own “mirror” file and be ready to challenge the IRS’s version. And the Tax Court will likely entertain these challenges: in whistleblower cases, the Tax Court has held that “the Commissioner cannot unilaterally decide what constitutes an administrative record.” (T.C. 145 No. 8 (2015)) Problem (basically) solved.

But there is a second issue that I think is worth exploring: when the parties dispute the scope of the administrative record. Specifically, my concern is whether an agency can shield information from court review through promulgation of regulations narrowly defining the administrative record. Because I am more familiar with CDP than whistleblower cases, I will use CDP as the example.

The applicable regulation (Treas. Reg. § 301.6330-1(f)(2)(A-F4)), defines the administrative record in CDP cases pretty broadly, so arguments about its scope would likely be rare. Further, even where the “record rule” is in effect, it doesn’t render the administrative record unassailable: a petitioner can supplement the record where something needs to be explained. This, I believe, is most common with “call notes” from Appeals. Whatever notes Appeals takes during a call are part of the administrative record. Notes from the petitioner… not so much (at least not under the regulation). As a matter of course, my tax clinic always sends a fax to Appeals memorializing the conversation after a call so that it becomes “written communication […] submitted in connection with the CDP hearing.”

To be sure, I don’t have serious problems with the definition of the administrative record as provided by the regulation. But it isn’t impossible for me to imagine things I’d like to have as part of the administrative record which, by a strict reading of the regulation, might not be. One that comes to mind are communications made with Appeals after the Notice of Determination. On this point you may say, “well those conversations are plainly irrelevant since the Court is only looking at the Notice of Determination. Also, didn’t you write something about the Chenery doctrine before?”

I have. Also, it is entirely plausible to read the regulation such that those conversations would be part of the administrative file. My cause for concern is that when you’re dealing with a genuine abuse of discretion from IRS Appeals, you are often dealing with a constellation of questionable behaviors that does not end with the Notice of Determination. When IRS Appeals is being unreasonable I want every incidence of their unreasonable behavior to be in the administrative record. “Abuse of discretion” is a mushy and extremely difficult standard for the Tax Court (or practitioners) to work with. I would argue that demonstrating a pattern of IRS Appeals behavior, even if some if it occurs after the Notice of Determination is written, is relevant to that determination. I also think that regulations limiting court review, absent pretty explicit Congressional language supporting it, raises separation of powers concerns and arguably could be subject to being stricken down (see Carl Smith’s post on a related matter, here.)

Perhaps I am making a big deal of nothing in the CDP context, given the expansive language of the regulation. But what about in Innocent Spouse cases?

Recall that the Taxpayer First Act changed the scope of review in Innocent Spouse cases to “the administrative record established at the time of the [IRS] determination.” (IRC § 6015(e)(7)(A)) What does that administrative record entail?

Bad news for those who look to the regulations: they haven’t been updated since 2002. At numerous points, the regulations do not apply present law and are essentially obsolete. The regulation specifically dealing with Tax Court review (Treas. Reg. § 1.6015-7) provides one such example, taking the position that collection activity need not be suspended while requests are pending for equitable relief under IRC § 6015(f). This is not the case under the law as it currently stands (see IRC § 6015(e)(1)(B)(i)).

But apart from getting the law wrong, the regulation is also completely silent on the issue of what comprises the administrative record. Perhaps after the IRS crawls out from the heap of CARES Act and other guidance projects it has been tasked with, updates to that regulation may also be in order (it isn’t presently on the IRS priority guidance plan). But what is the Tax Court to do until then? What should be in the administrative record?

The Supreme Court has provided a little guidance on that topic. Judge Halpern cites to Citizens to Protect Overton Park v. Volpe, 401 U.S. 402, 420 (1971) for the proposition that “the record amassed by the agency consists of ‘the full administrative record’ before the agency.” Judge Halpern emphasizes the word “full” and notes that lower courts have interpreted that “fullness” to entail “all documents and materials that the agency directly or indirectly considered.” That seems pretty expansive. But I suppose we’ll have to wait and see… the issue is likely to come up sooner than later now that petitions being filed are subject to this record rule (see Christine’s post here).

Making All Your Arguments in Collection Due Process Cases. Designated Orders, August 10 – 14, 2020 (Part Two)

Welcome back to second of this three-part installment of “Making All Your Arguments in Collection Due Process Cases.” In Part One, we looked at a threshold question of when you are entitled to even raise certain arguments to begin with. The statute (IRC § 6330) precludes taxpayers from getting “two bites at the apple” in certain circumstances. These include arguing the underlying tax if you received a Notice of Deficiency or otherwise had an opportunity to argue the tax (IRC § 6330(c)(2)(B)). Note that while you do not have the right argue the underlying liability in those circumstances, you still can raise the issue and hope that the IRS Appeals officer decides to address it. See Treas. Reg. § 301.6330-1(e)(3)(A-E11). But it is in the “sole-discretion” of IRS Appeals whether to consider the issue in that case, and the decision (so the Treasury says) is not reviewable by the Tax Court.

Today, instead of relying on the goodness of the IRS Appeals Officer’s heart, we’ll dive into issues that the taxpayer almost always has the right to raise.

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Issue Two: The IRS Screwed Up (Procedurally) In Assessing the Tax (Mirken v. C.I.R., Dkt. # 18972-17L (here))

In a Collection Due Process hearing, if you focus on issues in the tax process the Tax Court will usually hear them out (go figure). If it was even remotely catchy, I’d suggest the following mnemonic device: In CDP, Subtitle F Gets You A’s and Subtitle A Gets You F’s. Feel free to never, ever think of that phrase again.

The Mirken order highlights the importance of CDP as a way to check the processes in assessment and collection. It also is worth giving Judge Copeland kudos for ensuring that justice is done where the pro se taxpayers may not have used the precise tax jargon a practitioner would.

As noted before, if you don’t raise issues in your petition you run the risk of conceding them. Sometimes you have a way out by arguing that the issues were tried by consent under Rule 41(b), but you don’t want to have to rely on this. You also need to allege facts supporting your assignments of error if you are the party with the burden of proof on them. On the rare occasion that you (petitioner) don’t have the burden of proof, you only need to raise the issue.

In CDP, one area where the IRS has the burden of proof is in verifying that all applicable law or administrative procedures have been met (IRC § 6330(c)(1)). Note again that you still have to raise that issue in your petition in the first place. Here, the unrepresented taxpayers did not raise this issue in their petition, but arguably did in their objection to the IRS’s summary judgment motion. Judge Copeland finds this to be sufficient to amend the pleadings under Rule 41(a), and then takes a look at the IRS’s records on the issue.

As is so often the case, the IRS records do not inspire confidence. A testament (again) to putting IRS records at issue at.

There are three assessments leading to liabilities here: (1) taxes assessed on the original return, (2) assessable penalties relating to the original return, and (3) taxes assessed through the deficiency procedures -in this case through the IRS Automated Under Reporter (AUR) program. In the Notice of Determination, the IRS Settlement Officer stated that she had “verified through transcript analysis that the assessment was properly made per [section] 6201 for each tax[.]”

This is something of a twist on the usual boilerplate I receive in my Notice of Determinations, which are extraordinarily unhelpful and usually just say, “I have verified that all procedures were met.” But even this twist (referring to transcript analysis and an actual code section!) won’t save the IRS. Being slightly more specific isn’t enough for the Tax Court to simply “trust” the determination.

For one, Judge Copeland notes that the taxes assessed under the deficiency procedures would not be assessed under IRC § 6201, but rather the deficiency proceedings (see IRC § 6201(e)). The most important component of deficiency proceedings is the Notice of Deficiency (again, go figure). With regards to the Notice of Deficiency, validity depends on the taxpayer actually receiving the notice with time to petition the court or the notice being properly mailed to the taxpayer’s “last known address” even absent actual receipt. See IRC § 6212(b).

There does not appear to be a record of the IRS Settlement Officer looking up if or where the Notice of Deficiency was mailed. In fact, as Judge Copeland notes, it doesn’t appear that the Settlement Officer knows what the taxpayers “last known address” would even be in determining the validity of a Notice of Deficiency. Should we just trust that the IRS did it right?

No, we should not. Especially not on a summary judgment motion from the IRS. And especially not when, as in this case, the Settlement Officer already sent a letter to the petitioners at the wrong address for this hearing.

Accordingly, Judge Copeland has no problem finding there to be a “genuine issue of material fact” that precludes summary judgment. And that is surely the correct outcome.

But before ending the lessons of Mirken I want to bring practitioners back to a threshold problem, and something I began this post on: raising issues in your petition. Frequently, in my experience, at a CDP hearing you are really only discussing the appropriateness of collection alternatives. A best practice would be to raise the procedural issues of assessment in the hearing, but when that doesn’t happen is it still acceptable to assign error to it in a petition? Can you do that under Tax Court Rule 33 when you don’t actually have a concrete reason (just general history and skepticism) to question that the IRS properly followed procedures?

I have two thoughts on that. My first thought is to amend the petition after getting the admin file. Hopefully that will happen soon enough that you can amend as is a matter of right, but often I doubt that will be the case. Fortunately, even if it takes a while to receive the administrative file my bet is that the Tax Court would freely allow an amended pleading if you are only able to learn of the problem later (I also doubt most IRS attorneys would object in those circumstances).

My second thought is that your standard practice should always be to request the administrative file as it exists in advance of the hearing. It is always a good idea to have as full a picture as possible on what information the IRS is working off. But beyond that, because of the Taxpayer First Act, you have a statutory right to the admin file in conferences with Appeals (see IRC § 7803(e)(7)(A)).

The most recent letters from Appeals I have received setting CDP hearings have specifically referenced the right of the taxpayer to request the file. It is always wrong (and not even an “abuse of discretion”) for the IRS not to follow a statute, and failure to send information you are legally entitled to certainly could be part of a Tax Court CDP petition. This isn’t an attempt to “set a trap” for IRS Appeals, but information that would be critically important for us to raise all potential issues at the CDP hearing. I know that I’ve made such requests to IRS Appeals and am still waiting…

Making All Your Arguments in Collection Due Process Cases. Designated Orders, August 10 – 14, 2020 (Part One)

My tax clinic has had a run of Collection Due Process (CDP) hearings lately -four in two weeks- after months of basically no action. I’ve found that historically my workload increases significantly this time of year, where cases that were long dormant suddenly spring to life with tight deadlines just before the holiday season.

Most of these “hearings” end up being a 2-minute phone call confirming that the Appeals officer received our Offer in Compromise and will wait for the Offer unit to make their preliminary determination before checking in again. Because most of my Offer cases are clear winners, the next step is usually just insisting on a Determination Letter (I am wary of waiving my rights to Court review for reasons detailed here) from Appeals months later when the Offer is accepted.

But there are times when my Clinic and Appeals doesn’t see eye-to-eye in the hearing, and we file a tax court petition (in addition to our four hearings, we’ve also filed two petitions under CDP jurisdiction in the last month). I’ve found that drafting these petitions is a bit more difficult for my students than the traditional deficiency petitions are, mainly because the assignments of error are not as straightforward as when you are reading off a Notice of Deficiency. But if you don’t raise an issue, you potentially concede it (Tax Court Rule 331(b)(4)) so we want to cover all of our bases -especially when we think the conduct of Appeals was objectionable in myriad ways, and want to highlight all of the relevant facts showing that.

Often my students want to argue two things: (1) the IRS abused their discretion by [whatever specific thing they failed to consider] rejecting the Offer, and (2) Something else. But they’re not really sure what that something else is, so it often starts out as some version of “and Appeals was mean when they did it.” Three of the designated orders for the week of August 10, 2020 provide something of a checklist for what arguments you may want to raise in CDP litigation -a way to supplement or supplant the “something else” assignment of error. (The remaining fourth order of the week is not substantive but can be found here.)

Let’s take a look at the three, and the issues they raise, in something close to a chronological order of when the issue would come about.

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Issue One: The IRS Should Have Let Me Argue the Underlying Tax! (Iaco v. C.I.R., Dkt. # 19694-18L (here))

Metaphorical barrels of metaphorical ink have been spilled on this blog about when taxpayers are entitled to argue the underlying tax in a CDP hearing under IRC § 6330(c)(2)(B). The thorny issue centers on what comprises a “prior opportunity” to contest the tax. Some of the blog’s coverage can be found here, here, and here.

In my humble opinion, the Tax Court has taken an overly broad view of what comprises a “prior opportunity” precluding taxpayers from raising the underlying tax. Thus, a taxpayer that wants to raise that argument (like Iaco in the above order) already has an uphill battle. For Iaco it is perhaps less of a hill and more of a wall.

The taxes at issue are excise (a tax on wagers under IRC § 4401(a)(2), which I’ll confess I was wholly ignorant of prior to now) which are not subject to deficiency procedures. Where a Notice of Deficiency is not required, under Lewis v. C.I.R., 128 T.C. 48 (2007), the inquiry is usually “did you already take your shot with IRS Appeals before the CDP hearing?” Here, Mr. Iaco did indeed take that shot, and now wants to take it again with a new Appeals officer in the CDP hearing.

(For those interested, the Iaco order could also provide a good lesson on the importance of record keeping. It appears Mr. Iaco ran an illegal gambling operation, busted in part because of a one-day wiretap. The IRS used the information from that one-day tap and extrapolated additional wagers based on it. Mr. Iaco said, “no way is that accurate!” but refused to provide any actual records of what the right amount of wagers was. In other words, Mr. Iaco failed to keep records like he is required to (see Treas. Reg. § 1.6001-1). This puts the ball firmly in the IRS’s court. And while they can’t just pick a random number, there is case law that allows the IRS to multiply the amount of wagers documented for one day by the likely period of wagering.)  

If your argument boils down to “I want to argue the tax with Appeals again because I don’t like what Appeals decided the first time,” you aren’t going to get very far. But there is perhaps a sliver of a kernel of an argument that you can still make: instead of arguing with the outcome of the first Appeals hearing, you argue with the process.

Mr. Iaco wants to argue that he never really had a prior opportunity, because the first Appeals conference was not a “fair and impartial hearing.” IRS Appeals is supposed to be independent and there is at least some statutory authority geared at ensuring that impartiality (see IRC § 7803(e)). Might there be a baseline standard of conduct from Appeals for the hearing to qualify as an “opportunity?” If so, how do we determine that baseline?

Judge Halpern has some thoughts on that question and looks to Supreme Court precedent to guide his analysis -specifically, Mathews v. Eldridge, 424 U.S. 319 (1976).

Mathews is one of the handful of name cases I recall from law school and it is all about “procedural” due process. If I were to dredge up my old flash cards, my bet is they would have something to the effect of “Issue: how much process is due?” The other side of the flash card would (hopefully) lay out this abridged three factor test: (1) what’s the private interest being affected, (2) what’s the risk of the current procedures erroneously depriving that interest, and (3) weigh those considerations against the government’s interest/costs were the procedures changed. Swirl those factors around and you will get an idea for the amount of process (for example, providing an evidentiary hearing) that is due before the deprivation of the private interest (in Mathews, the denial of social security disability payments).

Constitutional procedural due process does not require that the IRS provide a “Collection Due Process” hearing before depriving an individual of their property (i.e. levying) to pay back tax. Indeed, the IRS did not provide CDP hearings prior to 1998 and their collection methods certainly weren’t unconstitutional up to that point. So what value does Mathews have here, when a facial attack on the constitutionality of the IRS’s collection procedures would be sure to fail?

Remember, Mr. Iaco’s issue is mostly with the first Appeals hearing he received, where he argued against the IRS calculation of wagers and didn’t feel as if he were being heard. There is a specific line in Mathews which Judge Halpern quotes: “The fundamental requirement of due process is the opportunity to be heard at a meaningful time and in a meaningful manner.” Mathews at 333 [internal quotes omitted]. This gets at the issue of looking beyond procedures broadly to how they are applied individual specifically. Yes, these procedures exist and meet the requirements of constitutional due process, but were they properly administered? Mr. Iaco says Appeals was just a rubber-stamp for the initial tax determination. The question is, did Mr. Iaco have a meaningful opportunity to explain himself and be heard by the Appeals Officer?

The Tax Court finds Mr. Iaco did, so he is out of luck. Other taxpayers, however, may have better facts, which is why I think this order is worth considering in the constitutional dimension that Judge Halpern raises. As I’ve noted before, I think the Tax Court has narrowed taxpayers’ opportunity to argue the underlying tax in a CDP hearing beyond what the statutory language requires or Congress intended. The current state of the law is such that if you had a hearing with Appeals arguing the tax (even through audit reconsideration), you have now blown your chance to raise it in a CDP hearing and get Tax Court review. I think this creates a massive trap for the unwary, and perversely incentivizes waiting until CDP to argue your tax rather than dealing with it at an earlier stage. My hope is that circuit courts will take up the issue and reverse the Tax Court interpretation of the statute.

For now, an opportunity with Appeals essentially always equals a “prior opportunity” to dispute the tax under IRC § 6330(c)(2). The only (possible) way around it that I can see is to argue that the first opportunity with Appeals wasn’t an opportunity at all, because it wasn’t meaningful. At the very least, Judge Halpern appears to contemplate that as a precondition under Mathews. I imagine you’ll need a lot of facts for that heavy lift, showing any number of IRS Appeals abuses, to make that showing.

Until that happens, we have to look for a new argument in our CDP petition…

Hazards of Litigation and IRS Mail Processing: A Way to Argue Late Filing Penalties? Designated Orders: July 13 – 17, 2020

The pandemic has caused a number of mail problems for the IRS. Perhaps the most frequently covered on this blog has been the IRS mailing backdated letters see posts here and here. On the flip side is the much more forgivable backlog of unopened letters (and especially tax returns) received by the IRS. I have multiple clients that allege, just prior to the pandemic, they sent things to the IRS by paper which have since gone lost in the ether. I suspect this issue will ripple out into many spheres of tax procedure. In this post I’ll go into depth on one designated order (Perimeter Protective Systems, Inc. v. C.I.R., Dkt. # 255-18SL (here)) that touches on some potential issues the IRS may be facing when those claims of unopened mail arise: the failure to file penalty as well as issues in trying to get attorney’s fees where you prevail on those matters.

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One of the most immediate and obvious complications of the IRS failing to promptly (or accurately) process mail involves the possibility of incorrect late filing and late payment penalties. Hopefully, most of those issues will be quickly resolved with the IRS on the administrative level. Where they aren’t, the Perimeter order provides some insights on what to argue and how to argue it with IRS Appeals.

Perimeter deals mostly with whether the petitioner (an S-Corporation) should be liable for failure to file penalties. From the outset, it should be noted that the petitioner “loses” in this order, but mostly just because the petitioner already “won” with IRS Appeals (i.e. had the penalties largely abated) much earlier and wanted things that are unreasonable thereafter. One of those things is compensation (the Court charitably defines as “administrative costs”) for the time petitioner and an accountant spent squabbling with the IRS over the late filing fees. More on the claim for fees in a bit.

For now, let’s look at the failure to file penalty and the lessons it may provide for practitioners. 

The IRS claimed that they did not receive Perimeter’s 2010 and 2012 tax returns until months after their respective due dates. Accordingly, the IRS assessed late filing penalties of $2,070 and $1,560, respectively. Petitioner requested abatement of the penalties thereafter.

In arguing for abatement Perimeter maintained that, while they had filed the returns late, they had mailed them months earlier than the IRS penalty calculations would provide. As evidence of this, Perimeter offered copies of the original returns bearing a signature well-before the date the IRS treated the returns as being effectively filed. 

Reading this order, I saw that as pretty weak evidence. For one, because a late-filed return is effective the date it is received and not the date it is mailed, I wasn’t so sure a fact (suggesting) when the return was mailed was too helpful. For two, and probably more obviously, just because you signed a return on a particular day doesn’t mean you also mailed it that day. I’m not even sure that is particularly strong circumstantial evidence. But as an advocate you take what you can get.

And here, Perimeter got quite a lot of mileage with that argument. Although the IRS denied the original request for abatement, Perimeter got a favorable determination from IRS Appeals: abating the 2010 penalty from $2,340 to $270, and the 2012 penalty from $1,560 to $540. That’s a total reduction of $3,090 based on rather flimsy evidence. Why was IRS Appeals so generous? Inquiry on that point, I believe, is where we find a lesson for practitioners.

The IRS Appeals Officer agreed to abate the penalties based on a “hazards of litigation” analysis. What hazards? Shouldn’t the IRS be able to say, “our records show the return came in on [x] day, and you have no compelling evidence otherwise?” Is the signature date on the return really that powerful?

Probably not, but my bet is the IRS doesn’t actually have good records for when the return was received, only when it was “processed.” And as we know from the trailers of unopened mail the IRS has accumulated during the pandemic, there can be something of a lag between those two dates. Note that IRS Appeals (but not the first level of examination) will consider these “hazards of litigation” arguments even when the route to litigation isn’t immediately clear. See IRM

Second, note that this is not a simple application of the “statutory” mailbox rule of IRC § 7502. That rule comes into play only if you place something in the mail at or before the deadline and the IRS receives it after the deadline, which did not occur here. The mailbox rule contains somewhat constrained evidentiary rules embodied in the regulations for determining the mailing date (see Treas. Reg. § 301.7502-1).  Those aren’t what we are dealing with here, or at least not directly. If timeliness was the issue Appeals would probably not have settled on hazards of litigation grounds, because Appeals could have simply sat back and waited for the taxpayer to produce evidence they likely didn’t have (i.e. a certified mailing receipt or the envelope with the stamp date). 

And therein lay the recurring, increasingly relevant lesson: if you can put IRS recordkeeping at issue you can create very real hazards. Nowhere is this truer than when it comes to the IRS handling of the mail. Usually both the burden of production and the burden of persuasion is on the taxpayer (and rightfully so, since usually the information imbalance favors the taxpayer on questions of whether they ought to be entitled to deductions, credits, etc.). This is not the case for most penalties as applied to individuals (see IRC § 7491(c)), where the burden of production is on the IRS, making their position all the more (potentially) precarious in litigation. There are times when the IRS would be the custodian of the necessary records, and it is on them to come forward with the proof. I was once at a presentation where an IRS employee said “we aren’t in the business of ‘taking your word for it.’” I heartily agree. And neither are taxpayers -especially after the IRS has admitted to sending letters with erroneous dates as referenced in the posts above. 

Coupled with the holding in Fowler (pertaining to e-filed returns) covered here, late-filing penalties may be more subject to successful challenges than they ever have been in the past. The new rationale being “mistaken identity” (i.e. my return wasn’t late) rather than “reasonable cause” which is often prohibitively difficult to show for purposes of IRC § 6651(a)(1) (though perhaps a window is opening there as well… see Les’s post here).

Did the IRS’s Conduct Warrant an Award of Attorney’s Fees?

So the petitioner in this case was able to get out of the lions-share of their late filing penalties. Why is this still before the Tax Court? It is because the taxpayer was not content with just having the penalties abated… and also because the petitioner apparently still hadn’t paid the underlying tax. That little issue seems to go by the wayside, however, as the petitioner continues to grind his axe for the IRS having the audacity to have taken more time than they should have to abate those penalties. 

Boiled to its essence, the case before the court is all about the petitioner wanting money. Petitioner wants money (1) for the time he personally spent on the case, and (2) for the fees he paid to an accountant in helping with the matter. Petitioner styles this as a request for “restitution” under the Federal Torts Claims Act, 28 U.S.C. 1346. That isn’t going to work for a range of reasons. Let’s focus on why it won’t work under IRC § 7430 either. 

It may be a surprise to some, but you don’t necessarily need to spend money to be entitled to attorney’s fees under IRC § 7430. Notably, where a taxpayer is represented by pro bono attorneys an award may still follow. See IRC § 7430(c)(3)(B). Half-a-decade ago I was involved in one such case (blast-from-the-past story here) argued before the 9th Circuit, and these attorney fees can really add up -especially if you end up in an appellate court arguing about why you should have received fees in Tax Court (“fees for fees” litigation). I’d note that the time law students spend in these pro bono cases may be eligible for fees. This is because law students at clinics have special authorization to practice before the IRS (and generally the Tax Court and Circuit courts), thus meeting the statutory language of IRC § 7430(c)(3)(A). More on that provision later.

I’d also snarkily note that shortly after my law school’s victory in getting (a lot of) attorney fees the IRS issued Rev. Proc. 2016-17 seriously cutting the rate at which we value law students time. Since I graduated, student hours have declined to being worth essentially 35% that of a full-attorney. I guess they don’t make ‘em (law students) like they used to. 

Ok, enough reminiscing. Back to the task at hand: trying to argue that Perimeter may have a facially legitimate claim for attorney’s fees. We’ve established that you don’t need to actually spend money to get attorney’s fees, which is a good thing for Mr. Hantman (the president of Perimeter) because he only spent time (not money) on himself when arguing with the IRS. 

However, there is a pretty obvious difference between engaging a pro bono attorney to represent you and simply representing yourself. Namely, that the pro bono attorney is not the same person as the petitioner. As Judge Copeland notes, the “courts have consistently held that under section 7430 pro se taxpayers may not be awarded an amount reflecting the value of their personal time in handling the litigation, even though the fees taxpayers pay to attorneys to handle the litigation would be recoverable.” Dunaway v. C.I.R., 124 T.C. 80 (2005). This seems consistent with the statutory language governing fees for pro bono services: it can only be awarded if paid out to the pro bono attorney or the pro bono attorney’s employer (i.e. not paid out to the individual the pro bono attorney is representing). IRC § 7430(c)(3)(B). 

But, for the sake of argument, could one argue in this case that the petitioner and the individual seeking fees are separate? After all, the petitioner in this case is Perimeter Protective Services, Inc. and the individual seeking fees is one Mr. Hantman. Can Mr. Hantman argue that what he is asking for is, essentially, pro bono services of a third party (however strained that argument may be)?

There might be some fact patterns where that argument presents a slightly more difficult question. Fortunately, this isn’t one of them and can be disposed of fairly easily. Mr. Hantman is not an attorney and is not “authorized to practice before the Tax Court or [IRS],” which the statute requires. The only capacity in which he is able to practice before the Tax Court in this case is essentially as a pro se litigant (i.e. as Perimeter). Note also that under Frisch v. C.I.R., 87 T.C. 838 (1986) the Tax Court disallowed fees to a pro se taxpayer that also was an attorney. Note that the Frisch opinion dealt mostly with the definition of “attorney” (as acting for another) and whether fees were incurred. It did not address the provision pertaining to pro bono services. Still, the takeaway is that you have to be representing someone other than yourself to get the attorneys fees award. 

That said, I do think the entity issue could present factual situations where you could get attorney’s fees while in a sense representing yourself. For example, what if some friends and I started an LLC selling widgets (because I’m not entrepreneurial enough to actually think of a real reason why I’d be involved in an LLC), and the LLC ran into tax problems. If I agree to represent the LLC in my personal capacity, free-of-charge, am I disallowed from otherwise getting attorney’s fees because of my ownership interest in the entity? Of course, those aren’t the facts here. Just a free, quarantine-inspired tax procedure hypo for anyone interested.   

Yet there is a potential second argument here: fees for the costs attributable to his accountant. A 3rd party accountant would be eligible for an award of attorney’s fees, if they are authorized to practice before the IRS. Petitioner doesn’t properly raise this issue, so the Tax Court doesn’t really go into it (recall that this was all stylized as a restitution claim under the Federal Torts Claim Act). Nonetheless, it too would be doomed to fail. The main reason has to do with the fact that the determination of IRS Appeals was not the problem: it was the earlier, lower-level processing problems that caused Mr. Hantman to accrue costs. Assuming (as I think we would be) that we’re dealing with administrative costs, the time when he was engaging his accountant aren’t going to be covered under the statute (IRC § 7430(c)(2) flush language). 

Professor Camp has a recent post that goes into more depth on that issue here. As that post (and court case it pertains to) make clear, it isn’t easy to get fees in a CDP context. So, despite our most valiant efforts to argue for Mr. Hantman, no dice in this instance.

Other Orders of the Week:

Oakhill Woods LLC v. C.I.R., Dkt. # 26557-17 (here)

Another easement case… another taxpayer loss. No real new ground to cover here, just clean-up of easement arguments that have been recently set aside in Tax Court opinions (in this case, an APA argument that the offending regulation is invalid -see Oakbrook Land Holdings, 154 T.C. No. 10 (2020)).

Strashny v. C.I.R., Dkt. # 13836-19L (here)

A last-ditch motion to reconsider the Tax Court’s opinion that the IRS did not abuse its discretion in denying an installment agreement. You’re already dealing with an uphill battle when you have to ask the Tax Court to essentially reverse itself (see my post here). The “hill” might as well be Everest when you have cryptocurrency assets between $3.3 and $7 million on a tax debt of “only” $1.1 million. Not surprisingly, the Tax Court denies the motion to reconsider whether $3.3 million is enough to full pay a $1.1 million debt. 

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

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

Subpoenas and Virtual Tax Court

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

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


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

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

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

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

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

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

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

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

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

Miscellaneous Cases

Another Scattershot Petition

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

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

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

A Day Late and a FedEx Receipt Short

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

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

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

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

How Old Is Old and Cold?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Orders not discussed, include:

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