A Drama in Three Acts: Designated Orders Jan. 13 – 17 (Part Two of Three)

Today we leave the familiarity of Graev and move into AJAC and administrative law. Without further ado I present:

Part Two: What to Expect When You’re Expecting A Better Deal from Appeals

Some of the most important designated orders are the ones that deal with common situations and fairly unremarkable facts, but raise arguments that rarely make it into published opinions. The order we will be discussing in Orienter v. C.I.R., Dkt. # 20004-13L (order here) is a perfect example. Though I (obviously) appreciate anyone reading my synopsis and analysis of the order, I strongly commend any practitioner that works in tax controversy (and especially collection) to read the order for themselves as well. It is that substantive and that worthwhile.

It is also fairly easy to digest. In just 16 (incorrectly numbered) pages Judge Holmes lays out four discrete issues I will focus on and three more that I won’t. The issues that I believe warrant additional detail are:

  1. How does the Court review the rejection of a multiple-year Offer in Compromise when the Court only has jurisdiction over some of the years contained in the Offer?
  2. How do the IRS “Appeals Judicial Approach and Culture” (AJAC) rules and procedures limit Appeals’ review of the record compiled by the Centralized Offer in Compromise (COIC)?
  3. Does the IRM or any other authority give taxpayers a way to accept an (initially rejected) Offer amount from COIC if the taxpayers end up doing even worse with Appeals?
  4. Is the IRM a source of “administrative procedure” such that a violation of it would be a violation of IRC 6330(c)(1) (that the requirement of “any applicable law or administrative procedure” be met)?

I’ve been at an ABA Tax Section meeting where Judge Holmes said that he would recommend studying administrative law to anyone considering going into tax. These are all interesting questions that bring us to the crossroads of administrative and tax law… Let’s see what Judge Holmes thinks about them.


To set the scene, Judge Holmes describes matters as getting “complicated” for the taxpayers, though I found this case represent a fairly typical scenario for taxpayers filing an Offer in Compromise. This doesn’t mean that the situation isn’t complicated, only that it isn’t particularly unusual. The main complicating factors were (1) the Orienters had more tax debts they wished to settle than just the years at issue in the CDP Notice, and (2) the Orienters sent their Offer to the IRC COIC unit, rather than to the IRS Appeals Office working the case. Since IRS Appeals really just forwards the Offer to COIC in any case, so long as you let Appeals know that you submitted an Offer it shouldn’t really affect your CDP hearing -other than likely to have it postponed until COIC reaches a preliminary determination. These two factors (multiple years at issue, and especially multiple “levels” of IRS review of the Offer) are what bring us to the interesting legal issues.

Issue One: How does the Court review the rejection of a multiple-year Offer in Compromise when the Court only has jurisdiction over some of the years contained in the Offer?

As we have been told once or twice before, the Tax Court is a court of “limited jurisdiction.” In a CDP case, jurisdiction is limited only to those years that were a part of the CDP hearing (and consequently, those on the Notice of Determination). The CDP hearing and Notice of Determination was strictly for the 2004 tax year, but the Offer was for 2002 – 2005 tax debts. Should the Tax Court only consider the jurisdictional year and ignore the other years, even though those years clearly matter to the Notice of Determination?

I’m not sure what that would really look like, since in filing an Offer you are essentially wrapping all of your tax debts into one liability and arguing your inability to pay that one liability. You can’t really just look at one year in reaching a determination of ability to pay, because you need to look at the tax debt as a whole. Luckily, I don’t have to spend much time thinking about what such limited review would look like because, as Judge Holmes notes, there is already numerous cases (though none that are technically precedential: see post here) on point that allow the Tax Court to consider the full debt (i.e. non-jurisdictional years) in reaching a determination of abuse of discretion for the jurisdictional year.

Should practitioners find themselves dealing with a similar strain of “jurisdictional trap” in CDP hearings, I’d commend them to read this order for the cases cited, and particularly the case of Sullivan v. C.I.R., 97 T.C.M. 1010 (2009) (apologies, couldn’t find a link) that Judge Holmes highlights. While I’ve never had the IRS try to argue that the Tax Court is barred from even considering non-jurisdictional years, the Court’s reasoning in Sullivan for when and why such years can be considered may be helpful, because it brings up the statutory language which could be relevant for far more than just rejected Offers. The most relevant section of Sullivan is:

“This Court is disabled from halting the IRS’s collection of [non-jurisdictional] liabilities, but it is not disabled from knowing about them. In determining whether the rejection of the OICs and the collection […] is appropriate, this Court is authorized (as the Appeals officer was required) to consider ‘any relevant issue relating to … the proposed levy.’ Sec. 6330(c)(2)(A), (d).”

So, as to Issue One, we have a fairly uncontroversial (though helpful and clarifying) answer: the Tax Court can consider the other non-jurisdictional years in order to determine if there was an abuse of discretion for the jurisdictional year in the Offer.

Issue Two: How do the IRS “Appeals Judicial Approach and Culture” (AJAC) rules and procedures limit Appeals’ review of the record compiled by the Centralized Offer in Compromise (COIC)?

It is with Issue Two, I believe, where things start to get slightly away from the ordinary CDP Offer. The Orienters Offer was originally for $25,000. IRS COIC preliminarily recommended rejection of the Offer, but that they might consider it if the amount was bumped up to $65,860 -the amount COIC calculated as the “Reasonable Collection Potential” (RCP). This was unacceptable to the Orienters, so they decided to try their luck with Appeals.

And it does not appear that their luck improved.

In fact, IRS Appeals determined that the RCP was closer to $200,000, and sustained the rejection of the $25,000 Offer, finding that even the special circumstances of the Orienters (who appear to have health problems) would not warrant accepting either the $25,000 or the $65,860 proposed by COIC. The Orienters, now fearing that they had perhaps made the wrong decision in not accepting the $65,860 Offer, tried to have the case sent back to COIC so they could accept that proposal. But they were stymied: IRS Appeals said the case could not be transferred. Eventually, a Notice of Determination reflecting this was issued.

This all comes down to what your options are when IRS Appeals seems to take a harder line than the originating function. Here, the Orienters want to argue that IRS Appeals is essentially barred from behaving as they did, or at least that their behavior is an “abuse of discretion” because it goes against the IRM vis a vis the “AJAC” rules.

Put broadly, AJAC is meant to have Appeals review cases more like a reviewing Court (i.e. limited to specific issues before it, rather than looking for or raising new ones). To the Orienters, this means Appeals was only supposed to review whether enough information was provided to warrant acceptance of an Offer less than $65,860 -not to re-work the Offer or raise new issues. The IRM provides that “[g]enerally, Appeals will sustain a rejection only under the same basis for which the offer was rejected.” (IRM But the basis of the rejection by Appeals was not the same as the basis of rejection by COIC. And so the IRS Appeals officer went against the AJAC principles embodied in the IRM, and thus abused its discretion.

The IRS, however, frames the issue a bit differently: the only issue was whether the Offer of $25,000 should be accepted or the levy sustained. Oh, and the IRS Appeals officer did follow the relevant IRM provisions (for example, in either case.

Judge Holmes sees the issue as hinging on what the meaning of the phrase “same basis” is in this context. If IRS Appeals did reject on “the same basis” as COIC, then there isn’t really an issue because IRS Appeals followed the IRM (more on what the consequence to not following the IRM could be in the next post, since it brings up some really interesting admin law points).

So what was is the “basis” for rejection at issue here? Judge Holmes thinks it would be too narrow to define the issue in the way the Orienters want. The question is simply whether an Offer should be accepted for $25,000  i.e. the Offer put forth and rejected. This amount was admittedly less than the RCP, and the discount was arrived at on the grounds of “special circumstances” (always difficult to quantify in exact dollars). When IRS Appeals reviewed the file and recalculated the RCP, Appeals wasn’t “raising new issues” but really just determining if they believed the $25,000 offer should actually be accepted (if Appeals didn’t take a second look at RCP, it isn’t immediately clear what they would be doing in Appeals to begin with). In finding that RCP + Special Circumstances did not equal $25,000 Offer, they were rejecting on the same basis as COIC -even if they reached a different amount they thought may be reasonable.

Thus, we conclude Issue Two: No AJAC violation. So no abuse of discretion on those grounds. On to the largely related Issue Three…

Issue Three: Does the IRM or any other authority give taxpayers a way to accept an (initially rejected) Offer amount from COIC if the taxpayers end up doing even worse with Appeals?

So maybe IRS Appeals didn’t violate AJAC. But is there another way the Orienters can get back to that (now-enticing) COIC number of $65,680? Let’s look a little bit more at how that number was memorialized, to understand what legal meaning it may carry.

When COIC proposes a rejection of an Offer, it will send a few spreadsheets walking through its calculation of RCP and, usually, a page of boilerplate about how they “considered” special circumstances but that they didn’t warrant accepting the Offer proposed. Sometimes when special circumstances are raised and considered the IRS may “suggest” an alternative Offer amount they may be willing to accept. Such appears to be the case with the Orienters. The question is how much “value” that suggestion of $65,680 holds.

There are a long line of cases that essentially treat Offers under contact principles. Which seems to make sense, since (1) it is loaded with contractual terms governing performance (e.g. filing and paying on time for five years), and (2) it is literally called an Offer in Compromise, with offer and acceptance being fundamental to the formation of a contract.

In this case, the Orienter’s would like to characterize that $65,680 as a counter-offer, which they are free to accept. Judge Holmes is not buying this: the COIC letter (which usually states “rejection”) was only that -a rejection. It was not a counteroffer, because “a mere inquiry regarding the possibility of different terms […] is ordinarily not a counter-offer.” Restatement (Second) of Contracts Sec. 39 (1981). In Judge Holmes’ words, the “$65,860 was never on the table – it wasn’t even in the oven.”

Further, even if the Orienters were able to characterize the rejection letter as a counter-offer (I believe the language of the letter said COIC “could not even consider an Offer of less than $65,680” which certainly makes it seem like a suggestion, and not a set term), they would probably not prevail on contract grounds. And that is because, lest we forget, the Orienters pretty clearly rejected the supposed counter-offer by going to Appeals. And once you reject, you can’t just “go back” now that you regret it.

So, no luck to the Orienters on trying to find some sort of authority for their proposition that they should be allowed to accept the “counter-offer” of $65,680. But does that mean the Orienter’s are doomed? Tune in for part three where we will look at one final (and very interesting) line of argument that explicitly puts administrative law and the IRM in the crosshairs.

A Drama in Three Acts: Designated Orders Jan. 13 – 17 (Part One of Three)

Sometimes I think the Tax Court Judges like giving me extra work by putting really substantive and interesting issues in designated orders. The week of January 13, 2020 was certainly one of those weeks. So much so, that it warrants (at least) three posts on two orders. Let’s start with our familiar friends (Graev and petitioners failing to prosecute) before moving on to new ones (the Accardi doctrine).

Part One: Tax Court, the Commitment to Getting the Right Tax… And Graev. Meyers v. C.I.R., Dkt. # 8453-19 (order here)

On a cold, winter’s eve I recently watched the critically-acclaimed “Marriage Story” on Netflix. Perhaps because I am unmarried and don’t have kids, what I found most compelling about the film was the portrayal of the family law attorneys -specifically, how incredibly different and adversarial their dynamic is from my own experience in tax. I finished the movie feeling uplifted… about my choice to go into tax law. The Meyers bench opinion was a similarly uplifting story: a reaffirmation that the Tax Court (and generally IRS Counsel) care mostly about getting the right amount of tax, and not simply the most amount of tax.

Of course, since this blog focuses on tax rather than romance (and only rarely the twain shall meet), my post will be on the interesting procedural aspects that arise. Luckily, this case provides a few such lessons that are worth taking a look at.


“Meyers Story” features a husband and wife in deficiency proceedings for, shall we say, “unlikely” deductions that the IRS disallowed. I will note a few of them for the sake of levity: (1) that 94% of their home was a “home office”, (2) that the husband’s remarkably unprofitable model airplane “business” was not subject to the hobby-loss limits, and (3) that his purchase of model airplanes were ALSO deductible advertising expenses for his (again, remarkably unprofitable) real estate “business.” These are but a few of the many improper deductions at play. Somehow, the case went to trial.

And that is where things get procedurally interesting. For this is not the time-worn tale of taxpayers filing a petition and then just moving on in their life. No, petitioners took many more steps than to simply “file-and-forget.” In fact, they almost saw the case to completion. They filed stipulations with the Court. They even showed up to Court and testified… but only for half of the trial.

Because of the numerous issues that had to be hammered out, the trial was set to span two days. The wife was able to wrap up her part on day one, which was helpful since she appears to work a fairly lucrative (six figure) job. The husband, on the other hand (whose sources of income are less clear) only had time on day-one to finish direct questioning: that is, to give his own testimony. He was set to come back on day two to face cross-examination. After reading the tea-leaves, however, Mr. Meyers decided against facing IRS questioning: in his opinion Judge Gustafson had “already made up his mind -it’s going to be a waste of time.” This was expressed in an email to IRS counsel before the second day of trial. The Court called Mr. Meyers and left a message explaining that he was required to show up to Court, but Mr. Meyers ignored it. Accordingly, the IRS moved that the case be dismissed for failure to prosecute and for the imposition of an IRC 6673 penalty.

So what is Judge Gustafson to do? Grant both motions and leave it at that? To appreciate the dilemma(s) facing Judge Gustafson, let’s look at what is supposed to happen when a case is dismissed for failure to prosecute.

Tax Court Rule 123(b) provides that when a case is dismissed for failure to properly prosecute the court may enter a decision against the petitioner. But can that decision (for our purposes, the deficiency amount) be whatever the Court wants? Does it have to be what the IRS wants, and if so is that simply the amount on the Notice of Deficiency?

The statute on point provides guidance, but some wiggle-room. IRC 7459(d) provides that the Court’s dismissal of a case (other than for lack of jurisdiction) “shall be considered as its decision that the deficiency is the amount determined by the Secretary.”

I think that could reasonably be read as “dismissal = affirming whatever is in the Notice of Deficiency” since that would appear to be the IRS determination that led to the case being brought. The code section doesn’t specifically direct that outcome -arguably, “the amount determined by the Secretary” could be more than the Notice of Deficiency if new issues were raised in the Answer, though that gets into hairy “presumption of correctness” issues not at play in Meyers.

However, more often the Tax Court and IRS are willing to enter a decision for an amount less than the Notice of Deficiency when a case is dismissed. As Judge Gustafson notes, “it is the frequent practice of this Court -often at the instance of the Commissioner to dismiss a case for failure to prosecute but to enter a decision in a deficiency amount smaller than what appears in the SNOD.”  Usually, this happens when the IRS has conceded some issues, but, Judge Gustafson notes, that isn’t the only circumstance: “we prefer […] to enter a decision based on the facts demonstrated by the evidence rather than as a punishment.” In other words, even when you have a bad actor that doesn’t prosecute their case and the IRS is standing by the SNOD the Court wants the right amount of tax when there is reason to believe the SNOD may be off.

Getting the right amount of tax rather than the most amount of tax… My eyes aren’t teary, I just have winter allergies.

Of course, the Tax Court does not take lightly the petitioner’s failure to prosecute. Judge Gustafson calls the failure to appear for cross “a most serious offense against the process” in our adversarial system, and does not wish to “reward[] the petitioner for his non-appearance.” But again, that isn’t enough to “punish” the taxpayer with an amount of tax that may be incorrect, so Judge Gustafson walks through the merits as if the case had been seen through to fruition.

Because a lot of the issues come down to the credibility of evidence, and because the petitioners have proven themselves to be extraordinarily non-credible (a little more on that in a moment), the vast majority of deductions are denied. Some deductions, however, are more mechanical. Judge Gustafson has no problem completely disallowing the ridiculous home office deductions, but notes that since 94% of the home mortgage interest payments were attributed to this (i.e. deducted on Schedule C), the petitioners should likely get that foregone 94% as an itemized deduction (i.e. deducted on Schedule A instead).

In sum, the SNOD was likely correct to disallow (almost) all the deductions, but it still didn’t quite get the right amount of tax after that. So we arrive at the procedural fix: what I’d style as a “conditionally” granted motion to dismiss. The IRS’s motion to dismiss is granted but only to the “extent of undertaking to enter decision in amounts of tax deficiencies smaller than those determined in the SNOD[.]” In other words, the case is dismissed, and a decision will be entered, but in an amount determined under Rule 155.

Everything appears to be neatly wrapped up. Except that there were two motions at play, and we have only resolved the motion to dismiss. What about the motion to impose sanctions under IRC 6673?

On the merits of the penalty, there is more to this than just the petitioner failing to show up for day two and taking egregious deductions. Petitioner husband pretty obviously created a fake receipt (one may say, committed fraud on the Court) for a charitable deduction from Habitat for Humanity, by altering the date to make it fall within the tax year at issue. Judge Gustafson doesn’t use the word “fraud,” but instead concludes that the husband “deliberately concocted a non-authentic receipt and tried to make the Commissioner and the Court assume it was authentic.” Fraud-lite, you may say.

Let’s just assume that the behavior and absurdity of the deductions are enough on the merits to warrant a penalty under IRC 6673. Are there any other hurdles that the IRS must clear?

Why yes, there (apparently) is: our old friend Graev and IRC 6751. Like any good story, this provided an unexpected twist. Although the penalty is proposed by motion, orally, at trial, Judge Gustafson finds that it would (likely) need written supervisory approval first. The IRS attorney had, in fact, asked their supervisor about the possibility of moving for an IRC 6673 penalty via email. But the supervisory response was simply “Print these for the court, please.” Cryptic, and apparently not enough to demonstrate approval.

The tax world has been abuzz recently with published opinions on IRC 6751. Procedurally Taxing has covered some here and here. Here, again, we have a designated order as bellwether for an emerging issue: none of the cases have ruled on whether written supervisory approval is needed in this context (i.e. a motion for court sanctions at trial). I fully anticipate that this order will result in either the IRS changing their procedures for such motions, or (less likely, in my opinion) litigating the issue.

Is that the end of the Myers saga? Not quite. In one final twist, we are reminded that the Court could impose the penalties sua sponte (perhaps “nudged” by the IRS motion). And the Court has (conveniently) found that it does not need written supervisory approval for imposing such penalties. See Williams v. C.I.R., 151 T.C. No. 1 (2018).

But in this instance Judge Gustafson decides to let them off with a warning and an indication that the Court may not be so forgiving in the future. A tantalizing cliff-hanger for the possibility of a sequel…

Assessment Statute Extension under 6501(c)(8); Changes of Address; and Lessons for Counsel – Designated Orders: December 9 – 13, 2019

My apologies for this delayed post; I had my head so buried in the Designated Orders statistics from our panel at the ABA Tax Section’s Midyear Meeting that I neglected the substantive orders from December. Worry no longer: here are the orders from December 9 – 13. Not discussed in depth is an order from Judge Guy granting Respondent’s motion for summary judgment in a routine CDP case, along with an order from Judge Gustafson sorting out various discovery disputes in Lamprecht, Docket No. 14410-15, which has appeared in designated orders now for the seventh time. Bill and Caleb covered earlier orders here and here.


As I mentioned during the panel, Designated Orders often resolve difficult, substantive issues on the merits. These orders are no exception. There were two cases that dealt with the deductibility of conservation easements. (Really, there were four dockets resulting in an order disposing of petitioner’s motion for summary judgment from Judge Buch, and one case resulting in a bench opinion from Judge Gustafson.) I’m not going to get into the substance of conservation easements, as clients in a low income taxpayer clinic seldom run afoul of these rules. Interestingly, this is also the first time we’ve seen a bench opinion in a TEFRA case—at least one that was also a designated order.

I must wonder, however, whether the Court strikes the appropriate balance in resolving substantively complex cases, on the merits, in either manner. While neither Judge Buch’s order nor Judge Gustafson’s bench opinion could have been entered as a Tax Court division opinion—as far as I can tell, they do not break any new ground—they could both easily qualify as memorandum opinions. As a practitioner, I find value in the ability to research cases that appear in reporters—precedential or otherwise. Relegating these cases to the relatively unsophisticated search functions found on the Tax Court’s website often makes it quite difficult to efficiently conduct case research.

Perhaps the Court’s new electronic system in July will remedy some of these issues. Nevertheless, any solution that doesn’t integrate with the systems that practitioners utilize to conduct case research—namely, reporters and the third-party services that catalogue and analyze the cases issued in those reporters—strikes me as inferior.

I fully understand and appreciate the value that the Court and individual judges place on efficiently resolving cases; that is no minor concern. I’ve been informed that issuing a memorandum opinion, as opposed to resolving a case through an order or bench opinion, can tack on months to the case.

But individual judges and the Court as an institution ought to carefully consider (1) whether the Court suffers from systemic problems in efficiently issuing memorandum opinions (and whether anything can be done to remedy these problems) and (2) whether the efficiency concern outweighs practitioners’ and the public’s interest in effective access to the Court’s opinions. 

More to come on this point in future posts. But for now, let’s turn to this week’s orders.

Docket No. 13400-18, Fairbank v. C.I.R. (Order Here)

First, a foray into the world of foreign account reporting responsibilities, which Megan Brackney ably covered in this three part series in January. Here, the focus lies not on the penalties themselves, but on another consequence of failing to comply with foreign account reporting requirements: the extension to the assessment statute of limitations under section 6501(c)(8).

Petitioner filed a motion for summary judgment in this deficiency case, on the grounds that the statute of limitations on assessment had long since passed. Petitioners timely filed returns for all of the tax years at issue, but the Service issued a Notice of Deficiency for tax years 2003 to 2011 on April 12, 2018—long after the usual 3 year statute of limitations under section 6501(a).

But this case involves allegations that the Petitioners hid their income in unreported foreign bank accounts. And section 6501(c)(8) provides an exception to the general assessment statute where a taxpayer must report information to the IRS under a litany of sections relating to foreign assets, income, or transfers. If applicable, the assessment statute will not expire until 3 years after the taxpayer properly reports such information to the IRS.

The statute applies to “any tax imposed by this title with respect to any tax return, event, or period to which such information relates . . . .” This appears to be the same sort of broad authority in the 6 year statute of limitations (“the tax may be assessed . . . .”) that the Tax Court found to allow the Service to assess additional tax for the year in question, even if it didn’t relate to the underlying item that caused the statute extension. See Colestock v. Commissioner, 102 T.C. 380 (1994). While the Tax Court hasn’t explicitly ruled on this question, it is likely that it would reach a similar conclusion for this statute.  

Respondent claimed that Ms. Fairbank was a beneficial owner of a foreign trust, Xavana Establishment, from 2003 to 2009, and thus had a reporting requirement under section 6048—one of the operative sections to which 6501(c)(8) applies. Further, for 2009 and 2011, Respondent claimed that Ms. Fairbank was a shareholder of a foreign corporation, Xong Services, Inc.—again triggering a reporting requirement under section 6038 and a potential statute extension under 6501(c)(8). Respondent finally claimed that Ms. Fairbank didn’t satisfy these reporting requirements for Xong Services until June 18, 2015—thus the April 12, 2018 notice would have been timely. Moreover, Respondent claimed, Ms. Fairbank hadn’t satisfied the reporting requirements for Xavana Establishment at all.

It’s important to pause here to note that the reporting requirements under sections 6048 and 6038 are separate from the FBAR reports required under Title 31. While the Petitioners filed an FBAR report for Xong Services, they seem to argue that this filing alone satisfies their general reporting requirements for this interest. That’s just not true; foreign trusts and foreign corporations have independent reporting requirements under the Code, under sections 6048 and 6038, respectively. Specifically, Petitioners needed to file Form 3520 or 3520-A for their foreign trust; they needed to file Form 5471 for their interest in a foreign corporation. And it is failure to comply with these reporting requirements that triggers the assessment statute extension under section 6501(c)(8)—not the failure to file an FBAR (which, of course, would have its own consequences). 

Petitioners claimed that they had, in fact, satisfied all reporting requirements for Xavana Establishment at a meeting with a Revenue Agent on July 18, 2012. But it seems that the Petitioner’s didn’t submit any documentation, such as a submitted Form 3520, to substantiate this. As noted above, they further claim the FBAR filed for Xong Services in 2014 satisfied their reporting requirements. Respondent disagreed, but did allow that the reporting requirements were satisfied later in 2015 when Petitioners filed the Form 5471. 

Because Petitioner couldn’t show that they had complied with the 6038 and 6048 reporting requirements quickly enough to cause the assessment statute to expire, they likewise couldn’t show on summary judgment that the undisputed material facts entitled them to judgment as a matter of law. Indeed, many of the operative facts here remain disputed. Thus, Judge Buch denies summary judgment for the Fairbanks, and the case will proceed towards trial.

Docket No. 9469-16L, Marineau v. C.I.R. (Order Here)

This case is a blast from the past, hailing from the early days of our Designated Orders project in 2017. Both Bill Schmidt and I covered this case previously (here and here). Presently, this CDP case was submitted to Judge Buch on cross motions for summary judgment. Ultimately, Judge Buch rules for Respondent and allows the Service to proceed with collection of this 2012 income tax liability. 

They say that 80% of life is simply showing up. Petitioner had many chances to show up, but failed to take advantage of them here. Petitioner didn’t file a return for 2012; the Service sent him a notice of deficiency. While Petitioner stated in Tax Court that he didn’t receive the notice, he didn’t raise this issue (or any issue) at his first CDP hearing.

Nonetheless, the Tax Court remanded the case so he could raise underlying liability, on the theory that he didn’t receive the notice of deficiency and could therefore raise the underlying liability under IRC § 6330(c)(2)(B)—but Petitioner didn’t participate in that supplemental hearing either!

Back at the Tax Court again, Petitioner argued that not only did he not receive the notice of deficiency, but that it was not sent to his last known address. This would invalidate the notice and Respondent’s assessment. The validity of the notice also isn’t an issue relating to the underlying liability; rather, this is a verification requirement under IRC § 6330(c)(1). So, if the Settlement Officer failed to verify this fact, the Tax Court can step in and fix this mistake under its abuse of discretion standard of review.

Petitioner changed his address via a Form 8822 in 2014 to his address in Pensacola. On June 8, 2015, he submitted a letter to the IRS national office in Washington, D.C., which purported to change his address to Fraser, Michigan. The letter contained his old address, new address, his name, and his signature—but did not include his middle name or taxpayer identification number. The IRS received that letter on June 15.

The Tax Court recently issued Judge Buch’s opinion in Gregory v. Commissioner, which held that neither an IRS power of attorney (Form 2848) nor an automatic extension of time to file (Form 4868) were effective to change a taxpayer’s last known address. We covered Gregory here. (Keith notes that the Harvard clinic has taken the Gregory case on appeal.  The briefing is now done and the case will be argued in the 3rd Circuit the week of April 14 by one of the Harvard clinic’s students.) Similarly, Judge Buch deals in this order with what constitutes “clear and concise” notification to the Service of a taxpayer’s change of address.

Judge Buch held that Petitioner didn’t effectively change his address. Under Revenue Procedure 2010-16, a taxpayer must list their full name, old address, new address, and taxpayer identification number on a signed request to change address. Taxpayers do not have to use Form 8822 in order to change their address, but this form contains all the required information to do so under the Rev. Proc. Because Petitioner failed to include his middle name and taxpayer identification number, the letter was ineffective.

Judge Buch ultimately holds that the letter was ineffective because the IRS received the letter on June 15—three days before the NOD was issued. The Rev. Proc. provides that a taxpayer’s address only changes 45 days after the proper IRS offices receives a proper change of address request. The national office is not the proper office; even if it was, the IRS only had three days to process the request prior to sending out the NOD. The lesson here is that if you know a NOD is coming, you can’t quickly trick the IRS into sending it to the wrong

If that wasn’t enough, Petitioner argued that because the USPS rerouted the NOD to a forwarding address in Roseville, Michigan, the NOD should be invalidated. However, the NOD was valid because Respondent send it, in the first instance, to Petitioner’s last known address prior to any subsequent rerouting.

There being no issue with the NOD’s validity—and because Petitioner didn’t participate in the supplemental hearing—Judge Buch granted Respondent’s motion and allowed the Service to proceed with collections.

Docket Nos. 12357-16, 16168-17, Provitola v. C.I.R. (Orders Here & Here)

The Court seems a little frustrated with Respondent’s counsel in this case. These orders highlight a few foot-faults that counsel—whether for Respondent or Petitioner—ought to be careful not to make.

This case is also a repeat player in designated orders; previous order include Petitioners’ motion for summary judgment from Judge Leyden here and Petitioners’ motion for a protective order here, which I made passing mention of in a prior designated order post.

Regarding the present orders, the first order addresses Respondent’s motion in limine, which asked that the Court “exclude all facts, evidence, and testimony not related to the circular flow of funds between petitioners, their Schedule C entity, and petitioner Anthony I. Provitola’s law practice.” Judge Buch characterizes this as a motion to preclude evidence inconsistent with Respondent’s theory of the case—i.e., that the Schedule C entity constituted a legitimate, for profit business. That doesn’t fly for Judge Buch, and he accordingly denies the motion.

He then takes Respondent to task for suggesting that “The Court ordinarily declines to consider and rely on self-serving testimony.” I’m just going to quote Judge Buch in full, as his response speaks for itself:

The canard that Courts disregard self-serving testimony is simply false. We disregard self-serving testimony when there is some demonstrable flaw or when the witness does not appear credible. If we were to disregard testimony merely because it is self-serving, we would disregard the testimony of every petitioner who testifies in furtherance of their own case and of all the revenue agents or collections officers who testify that they do their jobs properly, because that testimony would also be self-serving.

Ouch. In general though, I appreciate Judge Buch’s statement.  I recall being mildly annoyed reading court opinions that disregard a witness’s testimony because it was “self-serving.” For all the reasons Judge Buch notes, quite a lot of testimony will be self-serving. That’s not, without more, a reason to diminish the value of the testimony. It’s certainly not a reason to prohibit the testimony through a motion in limine. 

The second motion was entitled Respondent’s “unopposed motion to use electronic equipment in the courtroom.” (emphasis added). Apparently, the courthouse in Jacksonville has some systemic issues in allowing courts and counsel access to electronic equipment. Of what kind, the order does not make clear, though many district courts or courts of appeals where the Tax Court sits limit electronic equipment such as cell phones, tape recorders, and other devices that litigants may wish to bring as evidence to court. IRS counsel is likely the best source of knowledge on such restrictions; here, Judge Buch notes that the Court’s already taken care of these matters on a systemic basis for the upcoming trial session.

But Respondent’s counsel again makes a foot-fault here that draws an avoidable rebuke from Judge Buch. Respondent noted in his motion that he “called petitioners to determine their views on this motion, and left a voicemail message. Petitioners did not return this call as of the date of the motion, and as a result, petitioners’ views on this motion are unknown.” 

That’s not an unopposed motion! In Judge Buch’s words again, “The title of the motion (characterizing [it] as “unopposed”) is either misleading or false. . . . Consistent with Rule 50(a), we will treat the motion as opposed.”

Of course, because the Court had already resolved the issue with electronic equipment, Judge Buch denies the motion as moot.

Trial was held on 12/16 and 12/17. Judge Buch issued a bench opinion that held for Respondent, and designated the order transmitting the bench opinion on January 27. That’s Caleb’s week, so I’ll leave it to him to cover the underlying opinion.

How to Accelerate Collection in CDP: Designated Orders, December 30 – January 3

It was an interesting week for designated orders on collection due process (CDP) cases, with orders that really demonstrate the upsides and downsides to CDP protections. Professor Bryan Camp has sometimes referred to CDP as “Collection Delay Process” (as he notes here). Two of this week’s orders are illustrative of how the IRS might accelerate getting to collection where the petitioner appears to just be delaying for the sake of delaying, whereas one order reaffirms the purpose and value of judicial review when there may be a genuine issue of the proper collection actions. We’ll start with the IRS tactics for getting to collection when the taxpayer appears to be delaying just for delay’s sake.

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Tactic One: Motion to Levy While the CDP Case is Pending. Squire v. C.I.R., Dkt. # 13308-19L: (order here)

This was one of those rare orders that is covered (albeit briefly) by Tax Notes Today (found here, paid subscription required). So what is going on in this case that makes it TNT worthy? At first blush, not much: it looks like so many other CDP cases we have covered on these hallowed pages: the taxpayer didn’t provide any financials or collection alternatives during the hearing, the IRS doesn’t believe the underlying liability is properly at issue, and so the case should be resolved. Usually we would see that in a summary judgment motion. But that is where this case separates itself from the pack: the IRS isn’t moving for summary judgment, but actually wants to move forward with levy while the CDP case is pending (i.e. docketed). (Also perhaps setting this case apart is that the petitioner is apparently a well-known attorney…)

Generally, levy (for any taxable year at issue) is prohibited while a CDP hearing (or appeal therefrom) is pending. See IRC 6330(e)(1). However, the prohibition on levy does not apply if (1) the underlying tax is not at issue, and (2) the IRS shows good cause why levy should go forward. IRC 6330(e)(2). Thus, in a “Motion to Permit Levy” the IRS will need to show those two things: the issue isn’t the underlying tax and there is a good reason to allow the levy to proceed right now, rather than after the Court (presumably) upholds the IRS Appeals determination that a levy is warranted.

We’ve seen the IRS struggle a bit through summary judgment motions in the past. How do they do on the Motion to Permit Levy?

Not too well.

First off, petitioner claims (apparently without any support) that the underlying taxes were put at issue in the Collection Due Process hearing. But Judge Leyden doesn’t even need to consider that issue, because even if the IRS did meet that element they’d fail on “good cause.” Judge Leyden acknowledges that “good cause” is a slippery term, but cites to Burke v. C.I.R., 124 T.C. 189 (2005) for some examples of where good cause to allow a levy may be found: essentially, where the taxpayer uses CDP to bring up frivolous arguments or needlessly delay collection.

The IRS thinks that the petitioner is very much in the game of needlessly delaying collection. And this is because this taxpayer seems to always end up in Tax Court -having filed four CDP petitions (including the instant case) in the last eight years. This pesky petitioner just keeps insisting on CDP and losing (or at least losing two of the four times: one is still pending, i.e. the order at issue, and the Court does not explicitly reference the outcome in the fourth).

But is constantly insisting on your rights the same as needlessly delaying collection? That is a bridge too far for Judge Leyden, especially given the paltry record for the docketed case. It is not yet clear that, in this present case, the petitioner has no leg to stand on and evidence would show that it is all a delay tactic. The record shows that the petitioner self-reported the tax due, and participated in the CDP hearing. The record does not show (or at least the IRS hasn’t put forth evidence) that frivolous arguments have been made, so the argument seems to boil down to “this person keeps losing. And they should know better (subtext: the petitioner in this case is an attorney, apparently at one point quite well known, who has run into some ethical issues in the past), so it is a delay tactic.”

I’m sympathetic to the IRS’s concern in this case, since it appears that petitioner keeps losing for the same uncorrected issue: failing to pay estimated taxes (compliance being a prerequisite for essentially every collection option). But I’m not sympathetic to the way the argument was presented. Where the IRS wants to accelerate collection by levying during a CDP case, they need to do better by: (1) properly showing the underlying tax isn’t at issue (in this case, the only exhibit to the motion was IRS certificates of assessment, which just don’t go far enough to prove the underlying tax isn’t/couldn’t be at issue); and (2) putting the administrative record before the Court so they can actually see the arguments that were raised in the CDP hearing, and then have some idea if they are frivolous. I think the IRS particularly failed with the latter, since (arguably) the administrative record could also show that the underlying tax wasn’t raised in the hearing and thus would not be properly at issue. The administrative record is (increasingly) critical in non-deficiency cases, which can hurt the IRS just as easily as it can hurt the taxpayer if it is not properly developed.

Tactic Two: Summary Judgment Done Right. Peele v. C.I.R., Dkt. # 5447-19L (order here)

In Peele we have another serial CDP user (more accurately, “abuser”) but a different outcome -this time a success for the IRS on the more traditional motion for summary judgment. From Judge Gustafson’s stern rebuke to the petitioner (warning of potential IRC 6673 penalties in the future) this may have actually been a better vehicle for the motion to permit levy than the previously discussed Squire case. So how did we get here?

Ms. Peele appears to be one of those individuals that loves filing complaints/petitions, but not taking essentially any other action to address the problem. Her failure to act begins by failing to file a tax return for the year at issue (2012), resulting in an SFR. She later filed a CDP hearing request for the resulting Notice of Federal Tax Lien but it was upheld by Appeals. Undeterred, Ms. Peele filed a Tax Court petition… and then did not show up in court or respond to a summary judgment motion. Astoundingly, the Tax Court granted the IRS summary judgment motion.

But Ms. Peele was not going to let these losses get her down. So she appealed the Tax Court decision to the 4th Circuit Court of Appeals. Where her case was dismissed for… any guesses? That’s right: failure to prosecute.

All this time, effort, and wasted judicial resources on the 2012 taxes she never filed… and it isn’t over. Remember, the chronology I just walked through was from a Notice of Federal Tax Lien (docketed here). The designated order for the week still involves the 2012 taxes, but from a Notice of Intent to Levy.

So has Ms. Peele changed in the intervening years? Is the threat of a levy enough to prompt her to action beyond just filing in court? For those debating human nature, this one can be chalked up as a win in the “people don’t change” column.

Again, Ms. Peele makes every timely request necessary for Court jurisdiction, but does nothing thereafter: a timely CDP request that she fails to follow through on (i.e. skips the hearing) and a timely petition to Court that she fails to follow through on (i.e. fails to respond to the IRS motion for summary judgment).

So a petitioner that was very likely only using CDP to delay can delay no longer: summary judgment is granted. It is not immediately clear to me that a motion to permit levy in this case would have gotten to quicker collection for the IRS but my bet is it would have had a greater chance of success than Squire because no reasons exist for the court to review (she didn’t participate in the hearing) and that, coupled with her history, strongly suggests a “delay” purpose.

But Wait! CDP CAN Be a Valuable Check on the IRS. Lecour v. C.I.R., Dkt. # 22905-18L (order here)

So we’ve had two previous cases where the IRS seemed to reasonably believe the petitioner was just trying to delay collection through CDP. Is that all CDP is? One intricate delay tactic? Maybe not… This final order stands for the value of CDP as a check against IRS collection personnel.

The Lecour’s (husband and wife) are represented by counsel, and appear to have been fairly well engaged with the IRS throughout the CDP process. Namely, they submitted financials and specifically proposed a payment alternative (in this case, an installment agreement) for their rather sizeable 2013 and 2014 balances (totaling approximately $96,000).

Paying down a $96,000 bill, even over the course of many years, can be a difficult task for many. Here, the petitioners sought to alleviate this difficulty by proposing an installment agreement that began with lower monthly payments in the first year ($500/month), and then ramped up after that ($1,500/month). The reasoning behind this proposed structure was to give the petitioners time to restructure their living expenses so that they could afford to pay more in the second year and onwards. 

Of course, we wouldn’t be here unless the IRS had a problem with this proposal. And the IRS problem is one we’ve seen before: namely, that they believed the monthly amounts could be higher because their reported income should be higher and some of their necessary expenses should be lower.

Although some installment agreements for relatively low balances must be accepted as a matter of law (see IRC 6159(c)) the general rule (applicable in this case) is that the IRS has fairly broad discretion to enter into an agreement (see IRC 6159(a), noting the permissive language). Still, it is not boundless discretion, and installment agreements like these are exactly the sorts of cases where I appreciate the ability to get Court review rather than have the entirety of the decision rest in the IRS’s hands.

Of course, even with judicial review on proposed collection alternatives, taxpayers are often in a tough spot. As Judge Panuthos notes, review of collection alternatives involve an abuse of discretion standard and the Tax Court will not “substitute our judgment for that of the IRS, recalculate a taxpayer’s ability to pay, or independently determine what would have been an acceptable collection alternative.” That would appear to signal an uphill battle for the petitioner in this case. But perhaps there is hope… in the Internal Revenue Manual (IRM).

From the beginning it bears noting that the IRM does not create taxpayer rights and is not binding on the IRS (or the Tax Court). See, e.g. Thompson v. C.I.R., 140 T.C. No. 4 (2013) at footnote 16 for a list of cases on that point. In other words, it is not law.

However, the IRM does provide guidelines as to what the IRS’s policy is on the sort of financial analysis at play in nearly all collection cases. In other words, it provides some sort of yardstick for the Tax Court to consider how the IRS decided to exercise its discretion in collection: if the IRS completely ignores its own policy (reflected in the IRM) and doesn’t provide a reason why, that is a pretty good sign of “abuse of discretion.”

A couple things that the IRM provides in cases like this are (1) the permissive ability of the IRS to have provide the one-year “reorganization” period requested by petitioner (see IRM and (2) guidelines on allowable expenses (especially national and local standard expenses) in determining income that could be put towards the tax liability. If you deviate from those IRM provisions, you’d better clearly explain why.

And therein lies the problem for the IRS’s summary judgment motion. It just isn’t clear enough from the Notice of Determination (or record thus far) the exact reasoning for the number the IRS arrived at. If the numbers were clearly linked to the IRM positions (again, not binding) just saying so may well be reason enough. But where they aren’t following the IRM (or it isn’t clear that they are) you have an open question of whether the IRS employee was properly exercising discretion, or just doing their own thing -something CDP is likely intended to prevent.

And, thanks to Court review not operating as a rubber stamp on the IRS’s determination, you have protection before collection can take place. In the instant case, the IRS’s summary judgment motion is denied (effectively slowing down the collection action IRS hopes to accelerate) while the facts can be better determined, preventing potentially unaffordable or catastrophic levy. In other words, sometimes the process works.

Final Orders of the Week

For posterity’s sake, there were two other (essentially identical) designated orders from December 30 – January 3 in Giambrone v. C.I.R. They dealt with a motion for a protective order from a non-party to the suit and can be found here and here.

Serving Subpoenas: Designated Orders 12/23/19 to 12/27/19

I am sure the week of Christmas was a slow time in the Tax Court.  In fact, there were not a large amount of designated orders that resulted during the week.  The Christmas present we received in the form of designated orders was the sole designated order I will be discussing in this post.  It deals with subpoenas, meaning the focus of this article will be a greater examination of using subpoenas in Tax Court.

Serving Subpoenas

Docket No. 17324-18, Antoine A. Johnson v. C.I.R., Order available here.


The designated order in this case is short, only three pages.  The case itself does not have terribly much connection to the focus on subpoenas.  It deals with the petitioner’s claim of identity theft regarding a Form 1099-C issued by Bank of America, which led to a statutory notice of deficiency regarding cancellation of debt income attributed to the petitioner.

What happened in the order?  It concerns the case’s trial scheduled for January 13, 2020, in Washington, D.C.  On December 16, 2019, the IRS filed a motion for an order permitting them to issue a subpoena duces tecum directing Bank of America to produce documents to them on a date prior to the January 13, 2020 calendar.  Mr. Johnson did not oppose the motion, but the Court denied the IRS motion.

Why is that?  First, looking at the motion, it explains the IRS motivations regarding the subpoena duces tecum.  Actually, the IRS originally served on Bank of America a subpoena duces tecum after the case was set for trial, using Form 14 from the Rules of the Tax Court as a means to obtain documents for use at trial.  Bank of America informed them that they would not release documents before the date specified of January 13.  The IRS admitted that they were unable to specify any other date than the calendar call date listed.  Bank of America personnel advised they would “happily comply” if the subpoena duces tecum specified an earlier date.

That is why the IRS filed their motion.  They would like to receive the documents with enough time to review them and follow up if the documents were not compliant or otherwise direct them to further discovery or other relevant information.  They stated in the motion how it would benefit everyone involved if the Court could just move the date up that they received the documents.  Bank of America would not need to make a personal appearance in court.  The parties could have settlement discussions that might avoid judicial involvement or trial.

In Judge Gustafson’s discussion of the case, he compares Rule 45 of the Federal Rules of Civil Procedure (not applicable to the U.S. Tax Court) with Rule 147 of the U.S. Tax Court Rules.  They both permit litigants to use a subpoena to require a third party to appear at trial (or a pre-trial deposition) to testify or use a subpoena duces tecum to produce documents at such a trial or deposition.

Where they differ is that Rule 45 of the Federal Rules allows a litigant to use a separate subpoena to require a third party to produce documents prior to trial, apart from the scheduling of any hearing or deposition.  This is in effect what the IRS attempted and the judge states it is not an unreasonable request, and granting the request might yield the anticipated benefit.

The issue is that Rule 147 of the U.S. Tax Court Rules does not contain a similar authorization.  Turning to Internal Revenue Code section 7456(a), it provides that Tax Court judges may require by subpoena the production, among other items, of all necessary documents at any designated place of hearing.  There is a note that this authorization is different from, and apparently narrower than, the authority given to the Court of Federal Claims.  As a result, a Tax Court litigant may serve on a third party a subpoena to produce documents at a trial session and, at that session, may call on the Court to enforce the subpoena.

Judge Gustafson includes some suggestions for litigants.  A litigant that served a subpoena duces tecum on a third party could ask them to voluntarily produce the documents before a trial session and, if they comply, excuse them from appearing at the trial session.  Also, a litigant that served such a subpoena duces tecum could request the Court for a phone conference with the parties and counsel for the third parties to encourage voluntary early production of documents.  However, given the wording of IRC 7456(a), the subpoena duces tecum of a sort the IRS requested is not authorized so the motion was denied.

Takeaway:  The process of obtaining documents from third parties provides another example of how the Tax Court differs from other courts. A legislative change to allow amendment of the Tax Court rules to provide the flexibility for obtaining documents similar to the flexibility that exists in other federal courts would seem appropriate. Judge Gustafson’s suggestions for how to work around the problem make sense and provide examples of the work arounds that have been used by litigants for years. Why not stop the need for work arounds of this type and create a system that allows for a logical flow of information in a fashion that would reduce the need for the parties to run up to the moment of trial without necessary information.

For further information on subpoenas, turn to Tax Court Rule 147 and Form 14 (the subpoena form available on the Tax Court website).  Some advice I found from a private practitioner is that a volunteer can serve 5 subpoenas before needing to get licensed and that the Tax Court no longer stamps the subpoenas.  With paying clients, use a process server but cost depends on difficulty of service.  For further Procedurally Taxing reading on subpoenas, turn here, here and here.

A Trip to the Virgin Islands! And Other Designated Orders, December 2 – 6, 2019

There will be a panel on designated orders at the upcoming ABA Tax Section Midyear Meeting in Boca Raton, Florida on Friday, January 31. There will be some familiar faces presenting on the panel, including Keith and fellow Designated Order blogger Patrick Thomas, as well as Special Trial Judge Leyden and Rich Goldman from IRS Chief Counsel. 

Not to spoil the surprise, but a couple of things that I plan on speaking about include how designated orders can serve as bellwethers on emerging issues (think Chai/Graev), as well as how they frequently provide teaching moments I can use with my students or in practice. As it so happens, I found two such orders during the week of December 2, 2019: one as a bellwether on the emerging issue of what constitutes proper filing for returns in the Virgin Islands, and one as a teaching moment on why success on a prior year audit doesn’t generally have much (if any) impact on future year audits on the same issue.

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Designated Orders as Bellwethers: What Exactly Does Filing a Return in the Virgin Islands Entail, Anyway? Estate of Marco Musa v. C.I.R., Dkt. # 19216-17 (here)

The word “bellwether” comes from the shepherding practice of attaching a bell to a male ram in a flock of sheep, such ram then leading the flock. Apparently, it assisted shepherds by allowing them to ascertain the direction of the flock (by the sound of the bell) even when out of sight. Designated orders like the Estate of Musa operate similarly: alerting practitioners to issues that may be otherwise out-of-sight (because of a dearth of recent published opinions), while also giving a flavor for the direction the law is going.

When it comes to filing a federal tax return in the continental United States things are generally pretty uncontroversial. That isn’t to say that things don’t occasionally go awry, particularly with whether the paper return was sent to the proper location (an interesting example where the return was sent to the IRS counsel and IRS agent working the case, but not technically proper filing location can be found here) or if the electronically filed return was timely processed (see case here). Generally, however, what goes into actually filing a return is no longer the cause of much controversy.

Things are less straightforward when you are dealing with a return filed in the “organized, unincorporated” U.S. Virgin Islands (USVI). This is especially so if you are not a “bona fide resident” of the USVI, but are in fact a US citizen. In those circumstances, IRC 932(a)(2) provides that you need to file both in the USVI and the US proper.

Whether a return was properly filed is the dispositive issue in this case: if petitioners properly filed (as they claim they did) then the clock on assessment ran its course by the time the IRS got around to commencing deficiency assessment procedures. See IRC 6501. In other words, if the return was filed when Petitioners claim it was it would be a full win for the taxpayer. The IRS concedes as much, setting this showdown in a motion for summary judgment (by petitioners).

So what would it take for Petitioners to win? They advance two separate theories they believe would carry the day: (1) that they filed the returns with USVI, which is enough, at a date that makes the IRS deficiency procedures too late, or (2) that their returns were considered filed when the USVI authorities sent copies of the first two pages of the returns to the IRS.

The first theory can be quickly disposed of, in no small part because of the procedural posture of the order. The order is proceeding under the assumption that the petitioners are not bona fide residents of USVI, because (I assume) no such facts or stipulations have been put forwards establishing that, and in summary judgment the Court must make all inferences favorable to the non-moving party. Because petitioners are assumed not to be bona-fide residents of USVI, IRC 932 applies -and there is already a precedential case in the 11th Circuit (where this would be appealable to) that holds filing just in the USVI in such circumstances is insufficient. See C.I.R. v. Estate of Sanders, 834 F.3d 1269 (11th Cir. 2016).

So petitioners have to win on the second theory: that when the IRS received two pages of their USVI filed return that was sufficient to start the clock. And that is a much thornier issue that was kind-of-resolved in the Tax Court case in Hulett v. C.I.R. (and mentioned briefly here), and kind-of-not-dealt-with in the aforementioned Estate of Sanders in the 11th Circuit. Allow me to explain.

Hulett was a full court-reviewed opinion that involved a lot of difference in opinion among the judges, with a majority opinion on the outcome but a complete fracture (with no majority) on the reason for it. This sort of issue has been covered by Procedurally Taxing before (see the excellent discussion here). The “lead” opinion (of five judges) in Hulett found that the sort of situation here (photocopied pages of the return transmitted from USVI to the IRS) was sufficient to be a filed return starting the clock. Which is the petitioner’s argument. So a win, right?

Well, not quite.

For one (although it isn’t directly relevant to the Tax Court’s ability to follow Hulett here) the Hulett case is currently on appeal to the 8th Circuit. But more important is the treatment by the 11th Circuit of the position adopted in the Hulett “lead opinion.” The 11th Circuit opinion did not directly opine on the Hulett rationale, and it wasn’t (directly) before the court. However, the USVI Government filed as an intervenor in the case and did raise the issue on brief (as did the taxpayer). So the issue was before the Court, perhaps obliquely, in a case where the 11th Circuit found against the taxpayer. But because it was not directly brought up in the 11th  Circuit opinion, Judge Lauber notes that it is unclear if that the taxpayer lost because the 11th Circuit found the argument unpersuasive, or simply not properly presented (i.e. raised only on appeal, and not in the trial court). Note that had the 11th Circuit (directly) ruled on the issue the Tax Court’s position in Hulett would be irrelevant because of the Golsen rule.

So the 11th Circuit hasn’t ruled directly on the issue, Hulett produced a fractured Tax Court decision, and the 8th Circuit has yet to provide either imprimatur or rebuke to the lead opinion (or outcome) of Hulett. What is Judge Lauber to do with this summary judgment motion? Follow the lead opinion of Hulett in the Tax Court? Read Estate of Sanders as a rejection of the Hulett rationale?

Understandably, he opts for “wait-and-see.”

Usually, a motion for summary judgment motion will be denied because there are material facts in dispute. Here, it is more appropriate to say that the motion is denied because the underlying law is in dispute (or, better put, unsettled). Judge Lauber believes that the 8th Circuit opinion on Hulett could, conceivably, affect as persuasive authority what the 11th Circuit would decide on the instant case. Similarly, that decision may also affect what material facts come into play (apparently pertaining to the “intent” to file returns). So, because both the law (and possibly the facts) are still getting sorted out, let’s just wait. The motion for summary judgment is denied without prejudice, and can be refiled when the chips start falling. We’ll just have to wait and listen for the direction the next bellwether tolls… (apologies for belaboring the analogy).

Designated Orders as Teaching Moments: The Limits of Settlement Documents, the Taxpayer Bill of Rights, and Non-Binding IRS Guidance When Faced with Frequent Audit. Matarozzo & Beach v. C.I.R., Dkt. # 19228-14 (here)

I am often tasked with explaining to clients (and occasionally students) the near irrelevancy that an IRS audit (or lack of audit) for a prior year has on the year at issue. Sometimes the client misconstrues a previous lack of audit as a badge of approval: the IRS let me claim my cousin as a qualifying child for the last 4 years, how is it an issue now? Other times you have a situation like the one presented in the above order: the IRS has already audited me on this issue in the past, and I (largely) prevailed: shouldn’t they just leave me alone from here on out?

Answers to that question depend somewhat on the facts of the audit (particularly if the outcome hinged on an issue of law or an issue of fact), but the general take-away is that the IRS can certainly audit you on the same issue in a different year, because your circumstances (and eligibility for the deduction, etc.) may well have changed. Of course, the IRS does not want to commit resources to audits that are likely to result in a no-change or to give the impression of harassing certain taxpayers year-after-year, so there may be internal policy reasons why the IRS would be less likely to audit a taxpayer on a similar issue in a later year in those circumstances. But if you are looking on a legal prohibition on such audits you will be hard-pressed to find them (note that the (very weak) prohibition on multiple reviews of a taxpayer’s books under IRC 7605(b) only applies to multiple reviews on the same taxable year).

In the above case, the petitioner presents three different arguments (and three different sources of authority) for why the IRS should not be able to audit them on a particular issue. The order provides a quick lesson on the drawbacks to each source of authority and argument.

The relevant facts can be easily summarized. In 2014, the petitioners were audited for 2010 and 2011, and filed a tax court petition challenging the ensuing notice of deficiency. Like most tax court cases, the parties eventually settled on all issues. The IRS conceded more than 90% of the deficiency in 2010, and all of the deficiency in 2011. Both parties signed off on the decision document, the Tax Court entered it, and everyone went on their merry way.

And then the IRS went and audited them again in 2016, this time for tax year 2013. (At least they got a break for 2012?)

Interestingly, the taxpayer filed a motion to vacate or revise the decision in their earlier tax court case (i.e. the one that was docketed and resolved years ago by settlement) as a way to try to challenge the audit. The grounds for this challenge were (1) the signed decision document/settlement explicitly precluded the IRS from later audits on the issue, (2) an IRS publication provides that such audits are not allowed, and (3), for good measure, the Taxpayer Bill of Rights abhors such repeat audits.

Let’s quickly learn why each of these arguments is destined to fail -for both the facts particular to the client and the law more broadly.

Beginning with the decision document, the facts cut heavily against petitioner because the terms of the decision document cannot charitably be read to include any prohibition against future audits. Such an agreement simply isn’t included in the signed documents. Maybe Petitioner believed that the prohibition was in the terms and now wants to make the change, but even if the Court wanted to revise the decision they would be unable to do so based on the law, because under IRC 7481(a)(1) the decision was “final” years ago. And, as Judge Gustafson notes, “Unlike the Federal District Courts operating under Rule 60 of the Federal Rules of Civil Procedure [which allows numerous avenues for relief after a final judgment], the Tax Court is bound by that finality rule.” Further, even if the case were vacated on (essentially) contract grounds of invalidity of the settlement (no “meeting of the minds”) the result would be an entirely new deficiency proceeding, not a Court-imposed finding of a new term in the settlement agreement. So no luck there.

But Petitioner also trumpets an IRS Publication that seems to bolster his case: IRS Publication 334. The publication provides that “If we examined your return for the same items in either of the 2 previous years and proposed no change to your tax liability, please contact us as soon as possible so we can see if we should discontinue the examination.” Previously I had no idea the IRS had such a policy. Downright decent of the IRS to offer that.

The problems here is that (1) the language of the publication clearly does not say that the IRS will not audit, but may choose not to audit after a no-change, and (2) the policy apparently doesn’t apply to tax returns with Schedule Cs (which this return did). See IRM But more broadly, even if were applicable, I doubt it would matter. At absolute best, the publication would stand for the proposition that the IRS has the power to audit, but has decided in certain circumstances as a matter not to exercise such discretion. But this case is a deficiency proceeding, and is not looking at “abuse of discretion” of the IRS actors. Further, even if it were I don’t think it would get very far. IRS Publication 334 is not an IRB publication, and is unlikely to have any real binding effect on the IRS even as a matter of internal policy. You really can’t rely on such publications for much of anything other than general guidance -or, perhaps, assisting a reasonable cause argument under IRC 6664. So again, no dice.

Lastly, Petitioner raises in broad strokes the argument that the Taxpayer Bill of Rights (TBOR) would not allow for these later audits. The contours of TBOR and their potential legal effect are still being developed. Thus far the Courts are extremely reluctant to give much teeth to the (admittedly broad and sometimes vague) provisions of TBOR. That said, there are certain contexts in which TBOR arguments may supplement or reinforce legal arguments that a Court may entertain. Most likely, those are in cases where the Court is tasked with deciding whether there was an “abuse of discretion” by the IRS. Keith has written about TBOR’s potential quite a bit (see Temple Law Review article here). But this is not such a case, since this is not in a stance where the Tax Court is being asked to review (or has the authority to review) an act of agency discretion. The petitioner is arguing that the IRS is straight-up prohibited from the later audit. And you will need something a bit stronger (say, a contract or, even better, code section) that reasonably gets you there. The broad strokes of TBOR will not suffice, and the Tax Court recites the (in my opinion, debatable) proviso that the TBOR does not “create any taxpayer rights; rather, [it] allude[s] to provisions elsewhere in the Internal Revenue Code.”

No dice, again. But at least we learned a bit about some IRS policies on future audits, and the finality rule of the Tax Court.

Remaining Orders of the Week

For the sake of completeness, a rundown of the remaining orders for the week of December 2, 2019 are as follows:

Tax Protestor That Will Get Penalties If He Keeps Pushing His Luck (Cooper v. C.I.R., here)

Tax Protestor That Gets Hit With Penalties… And is a Familiar Face (see post here) (Walquist v. C.I.R., here). More depth on this fairly familiar theme of designated orders can be found in a previous post here.

Petitioner That Fails to Respond to Summary Judgment Motion… And Loses (Laurent v. C.I.R., here)

Petitioner That Fails to Show Up to Court… And Loses (Davis v. C.I.R., here)

Bench Opinion: Petitioner (Shockingly) Bred Horses Without Profit Motive (Skarky v. C.I.R, here)

Bench Opinion: Petitioner (Shockingly) Has Gain On Sale of Collectibles When He Doesn’t Track Purchase Price (Ferne v. C.I.R., here)

Unsuccessful Petitioners in Collection Due Process and Premium Tax Credit Cases: Designated Orders 11/25/19 to 11/29/19

The end of November brought 3 designated orders, where (spoiler warnings) the petitioners did not prevail.  In two collection due process cases, the petitioners were non-compliant and that led to their downfall.  The last involves a bench opinion concerning the premium tax credit and income limitations to qualify.


Collection Due Process Case 1

Docket No. 18362-18, Karson C. Kaebel v. C.I.R., Order and Decision available here.

Mr. Kaebel did not file a tax return for 2011 and the IRS filed a substitute for return.  Based on the substitute for return, the IRS mailed a statutory notice of deficiency.  Mr. Kaebel did not respond to the notice of deficiency so the IRS issued a Notice of Federal Tax Lien Filing and right to a Collection Due Process hearing in 2014, but he did not respond to that either.

In 2017, the IRS issued a Notice of Intent to Levy regarding Mr. Kaebel’s personal property.  Here, he filed a form 12153 in response to his right to a Collection Due Process hearing.  On the form, he stated that he disputed the proposed tax and penalties, requested a face-to-face hearing, which he intended to record, and his interest in discussing collection alternatives if convinced he owed the tax.

The settlement officer informed him that he could not dispute the underlying liability for the tax and additions since he did not do so in response to the 2014 notice.  The officer scheduled a telephone conference, informing Mr. Kaebel he was not eligible for a face-to-face hearing.  In order to be eligible for collection alternatives, Mr. Kaebel would need to submit a completed Form 433-A, file tax returns for 2012 through 2016, and provide proof of being current on estimated tax payments.  If Mr. Kaebel provided proof of the filed tax returns and estimated tax payments, the settlement officer would consider the face-to-face hearing request.

Since Mr. Kaebel did not provide the requested documentation and did not attend the telephone hearing, the Appeals Team Manager sustained the proposed levy action.

Mr. Kaebel disputed receiving the statutory notice of deficiency and whether one had been issued.  IRS Appeals has a copy of the statutory notice and reviewed the Certified Mailing List to confirm that the notice was mailed to his address of record.

Mr. Kaebel timely petitioned the Tax Court.  In his assertions, he says the IRS did not provide him with requested documents, was not granted a face-to-face hearing, was not granted the opportunity to challenge the liability, and did not receive the notice of deficiency.  He also states the statutory notice was not verified by a duly authorized delegate as required by the Internal Revenue Code, having no idea who “S1STSIGA” is.  The IRS moved for summary judgment on the grounds there was no abuse of discretion.

In the Court’s analysis, Mr. Kaebel received the notice of deficiency and did not act upon his opportunity to challenge the liability then.  Next, the face-to-face hearing is not mandatory so it was justified to deny Mr. Kaebel’s request there.  Mr. Kaebel did not provide the requested documents.  Last, case law recognizes a presumption of official regularity to conclude the signature on IRS notices comes from a duly authorized IRS officer.

The Court concludes there is no abuse of discretion and grants the IRS motion for summary judgment.

Collection Due Process Case 2

Docket No. 21687-18 L, Debra Zalk Spitulnik & Charles Alan Spitulnik v. C.I.R., Order and Decision available here.

The Spitulniks had tax liabilities for tax years 2008, 2009, and 2012.  By October 2017, the outstanding balances for those years were approximately $58,000, $108,000, and $1,800 for those tax years, respectively.  The IRS at that point filed a Notice of Federal Tax Lien.

In response to the notice of the tax lien, the Spitulniks requested a Collection Due Process hearing.  On their form, they asked for an installment agreement, lien withdrawal, and innocent spouse relief (that relief is being reviewed under a separate Tax Court case).  They attached to their request a letter describing their medical conditions, related financial hardships, and difficulties they faced in managing their financial obligations.  The IRS determined they “met one or more of the elements” of IRC section 6323(j) and withdrew the federal tax lien.

In scheduling the Collection Due Process hearing, the Appeals Officer informed the Spitulniks that they would need to be current on their 2017 and 2018 tax obligations to consider an installment agreement.  To do so, they would need to submit $31,486 in estimated payments toward their 2017 tax account (estimated because the 2017 tax return was on extension and not yet filed), plus any 2018 estimated payment required.

Before the hearing, the Spitulniks submitted correspondence about their financial situation but nothing about compliance with estimated tax payments.  On the date of the hearing, they informed the officer that they submitted a $17,000 estimated tax payment for 2017.  He notified them they could not qualify for an installment agreement for the three years of liabilities because they were not fully in compliance.

The IRS issued a Notice of Determination Concerning Collection Action(s) under Section 6320 and/or 6330 concerning the prior removal of the tax lien and their ineligibility for the installment agreement based on noncompliance with payments for 2017 and 2018.

The Spitulniks timely petitioned the Tax Court based on the notice of determination.  Within their later submissions to the court, they provided an IRS transcript for 2017 that shows an overpayment for 2018 was applied toward the 2017 liability.  The transcript still shows an unpaid balance for 2017 of $10,689.51.  The IRS filed a motion for summary judgment.  The Spitulniks filed a response and the IRS replied.

In the Court’s analysis, the issues before the Court are whether there was abuse of discretion by the IRS regarding the notice of federal tax lien and the denial of the installment agreement.  Since the IRS withdrew the federal tax lien in 2017, the Court considers the issue resolved.  The Spitulniks were not compliant regarding payments for the 2017 tax year so could not qualify for an installment agreement.  There is no abuse of discretion since it is within the judgment of Appeals to require compliance when determining collection alternatives.  There is no genuine dispute as to any material fact so the motion for summary judgment was granted.

Takeaway:  For both cases, I understand that compliance is necessary in order to qualify for relief in a Collection Due Process hearing.  However, it seems like the requirements were too burdensome for the petitioners.  Mr. Kaebel, for example, had to get 5 years of tax returns filed and I have seen taxpayers unable to pay for multiple years of tax return preparation.  The Spitulniks had $31,486 owed and paid $17,000 for 2017.  They also communicated about medical conditions and financial difficulties so it seems they had issues but took a significant step toward compliance.

I realize that I am viewing these cases through the lens of a low income taxpayer clinic director so I might be giving them more sympathy than they are due.  However, I wonder if the bar was set too high by the IRS for them to find relief from the Collection Due Process system.

Premium Tax Credit Bench Opinion

Docket No. 13346-18S, Wayne Dennis Woodrow & Colleen J. Woodrow v. C.I.R., Order available here.

Originally, the IRS issued a notice of deficiency to the Woodrows regarding their 2016 federal income taxes with a section 6662(a) penalty.  The IRS conceded a portion of the deficiency and the penalty before trial at Tax Court.  The portion of the deficiency in dispute related to the premium tax credit.  At issue were whether the Woodrows were entitled to the premium tax credit and whether the advance payments of the premium tax credit received exceeded the credit.  Judge Carluzzo provided details in his bench opinion.

Mr. Woodrow was laid off after a long career in the coal industry.  He was able to continue with health insurance for his family through a private plan at least through 2015.  After there was a dramatic increase in the plan, Mr. Woodrow investigated and ultimately chose another plan with the same insurance carrier through the marketplace in 2016.  Part of his decision process was that a portion of the cost would be covered by the advance payment of the premium tax credit.

Mr. Woodrow prepared their return using tax software and the adjusted gross income shown on the return is significantly higher than anticipated, due to the majority of that increase being from distributions from his retirement account and pension plan.

To be an applicable taxpayer that qualifies for the premium tax credit under IRC section 36B(c), taxpayers must have household income between 100 percent and 400 percent of the poverty guidelines.  Household income is based off of the modified adjusted gross income.  Contrary to the advice he received, the retirement income is included in the modified adjusted gross income for figuring the premium tax credit.  The retirement distributions pushed the Woodrows above 400 percent of the poverty guidelines.  They were no longer eligible for the premium tax credit so would need to repay the advance payment they no longer qualified for.

The main argument Mr. Woodrow makes against the repayment is that he received erroneous advice that the retirement income would not be part of the computation of household income for the premium tax credit.  Reliance on that advice led to choosing a marketplace plan they would not otherwise have chosen.  Both the IRS and the Tax Court provided their sympathies for the Woodrows, but they have no discretion to provide an alternative equitable result.

The deficiency determined in the notice, as modified by the IRS, was sustained and in order to give effect to the modification and concession of the 6662(a) penalty, the judge’s decision will be entered under Rule 155.

Takeaway:  In connecting the dots, I see a story where Mr. Woodrow was laid off from his job and took distributions from his retirement account and pension plan in order to have income to live off of.  Next, he self-prepared their tax return but did not take into account that the distributions negated the advance payment of the premium tax credit.  Looking to cut costs and provide for the family combined with ignorance of tax laws eventually led to problems with the IRS and a trip to Tax Court.

As noted above, the Court is sympathetic to taxpayers in these circumstances regarding the premium tax credit.  The main case cited is McGuire v. Commissioner, 149 T.C. 254 (2017), where the Court explains that they are “not a court of equity” and “cannot ignore the law to achieve an equitable result.”  For discussions of that case and related links regarding the premium tax credit in Procedurally Taxing, links are here, here and here.

Welcome, Baby Galvin!

Perfectly timed for our emphasis on designated orders, Bridget Merrily Galvin arrived on Sunday, January 19th, weighing 6 lbs., 10 oz. We are excited for Bridget’s parents and looking forward to a new blog reader in a few years. Samantha is taking a sabbatical from blogging for the next three months. Exciting news.