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.

read more…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Orders not discussed, include:

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

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

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

Scattershot Petitions

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Valuing a Collection

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

read more…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

read more…

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

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

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

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

Not quite.

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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