Summary Opinions for the weeks of 3/06/15 through 3/20/15

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This will be the last post for the week, as we will all be busy with family activities (and taxes).  We should be back on Monday with some new content, and it looks like next week will cover some really interesting areas, including the recent Godfrey case, and sealing Tax Court records.

We have been very lucky over the last month to have a lot of really great guest posts.  We cannot thank those guest posters enough for the quality content, especially as the three of us have been very busy with our various other jobs (or appearing before the Senate–perhaps more on that next week also).  For the weeks that SumOp is covering in this post, we had Mandi Matlock writing on TPA Most Serious Problem # 17 on how deficient refund disallowance notices are harming taxpayers.  Peter Lowy wrote on the really interesting Gyorgy case, which deals with the taxpayer’s requirement to notify the Service on a change of address, but also highlights a host of other procedure items.   Patrick Smith joined us again, writing on Perez v. Mortgage Bankers Associate, and illuminating us on APA notice and comment requirements for different types of rules and the possible eventual reversal of Auer.  We also welcomed Intuit’s CTO, David Williams who wrote a response to Les’ prior post on H&R Block’s CEO indicating it should be harder to self-prepare (which Les was potentially in favor of).  And, another first time guest blogger, Patrick Thomas, joined us writing on the calculation of SoLs on collections matters.

We were also very lucky again to have Carl Smith writing for us, this time updating us on the Volpicelli jurisdiction case and the Tax Court pleading rules on penalties looking at the El v. Comm’r case.  A thank you to all of our guests over those two weeks, and a special thanks to Carl for his continued support.

To the other procedure items (if you keep reading, the image will make more sense):

  • The Service released CCA 201510043, in which Chief Counsel stated a taxpayer is entitled to two sets of collection due process rights for the same period when there were two assessments; one for assessment arising out of a civil exam and the other from restitution-based assessment.  Section 6201(a) was recently (five years ago) amended to require assessment and collection of restitution in the same manner as tax.  The advice has a nice summary of cases outlining why this double assessment of the same tax is not double jeopardy.  Although the general rule is that a taxpayer is entitled to one CDP hearing with respect to tax and tax years covered by the CDP notice, there are situations where multiple hearings are appropriate.  The advice highlights Treas. Reg. 301.6320-1(d)(2) Q&A D1 and Treas. Reg. 301.6330-1(d)(2) Q&A D1 as examples of allowing two CDP hearings when there has been additional assessments of tax or new assessments for additional penalties.  The Advice determined that this situation was analogous and warrants two separate CDP hearings.
  • The Northern District of California in In Re Wilson held that penalties for failure to timely file were dischargeable when the original due date was outside of the three year look back under BR Code 523(a)(7)(b), but the taxpayer had extended the due date and the extended date was within the three years.  The Court indicated this was a case of first impression.  Another interesting BR Code Section 523 issue.
  • This clearly only pertains as a practitioner point, and not something any of our readers would personally need, but OPR has announced a standard information request letter to make a Section 6103 request for information maintained by OPR relating to possible violations of Circ. 230.  Info about the letter is found here, and you can get the actual letter here.
  • The Ninth Cir. affirmed the Tax Court in Deihl v. United States in finding a widow spouse did not qualify for innocent spouse relief.  In the case the Court did not find there was clear error by the Tax Court in reviewing the widow’s testimony and find it was not credible.  The surviving spouse provided testimony that conflicted with other evidence regarding the couples’ business, and she did not offer any third party testimony regarding the abuse.  The widow argued that since the Service did not offer contrary testimony regarding the abuse, the Tax Court had to accept her testimony, which the Ninth Circuit stated was incorrect.  Further, looking to Lerch v. Comm’r, a Seventh Circuit decision, stated that the Tax Court did not have to accept testimony that was questionable, even if uncontradicted (tough to overcome the presumption of guilt that comes along with a name like Lerch).
  • Gambling causes fits for the Service.  Tipped casino employees used to underreport frequently, but apparently casinos will provide estimates to the Service.  Gambling website accounts might be offshore accounts (even if sourced in US banks). Add to that list of problems how to treat bingo, keno and slot machine winnings.  This blurb will focus on slot machines.  New proposed regulations offered in a recent IRS Notice would provide a safe harbor to determine gains and losses from a slot machine.  The issue is that gains from “transactions” are included in income.  Losses are deductible to the extent of winning, but generally as itemized deductions.  For slot machines, a “transaction” is session based.  What is a session can be a point of disagreement between the Service and taxpayers.  This is apparently becoming more murky now that people don’t use actual coins.   So, what are those retirees on the bus trips to AC or Vegas to do?  The Service is soliciting suggestions, but the current proposed safe harbor states that a session of play:

A session of play begins when a patron places the first wager on a particular type of game and ends when the same patron completes his or her last wager on the same type of game before the end of the same calendar day. For purposes of this section, the time is determined by the time zone of the location where the patron places the wager. A session of play is always determined with reference to a calendar day (24-hour period from 12:00 a.m. through 11:59 p.m.) and ends no later than the end of that calendar day

The Notice then goes on to explain how to calculate gains and losses during the session.

  • Add this to the list of things that will not get you out of the failure to timely file penalties – taxpayer could not access tax records because his storage unite doors had frozen over.  The argument received an icy reception (oh, man that was bad) with both the Service and the Tax Court. See Palmer v. Comm’r., TC Memo 2015-30 (for some reason this isn’t up on the TC web page anymore – sorry).
  • If you are going to cheat on your taxes, you probably should do so using offshore accounts (I usually charge clients a .5 for that advice, and you all just got it for free!).  Check out Jack Townsend’s blog on US v. Jones, an “ordinary tax cheat”, as Mr. Townsend put it, who got dinged with 80% of the bottom of the guideline range for sentencing.  He was using “sophisticated means”, which seemed fairly run of the mill.  Jack compares this to the sentencing of another UBS client, who ended up getting 22% of the bottom of the guideline range.  Switzerland should use this in its promotional materials.
  • In MSSB v. Frank Haron Weiner, the Eastern District of Michigan found that Section 6332(a) did not establish priority for competing liens, and instead Sections 6321, 6322 and 6323 established the priority (in favor of the IRS in this case).  In MSSB, a debtor owed funds to the IRS and a lawyer named Frank.  The Service recorded four liens, each before December 3, 2012.  Around $1.6MM was owed.  On December 6, 2012, Frank sued the debtor to recover unpaid legal fees and won.  In 2013, Frank obtained a writ to garnish the debtors IRA (Michigan must not offer much in terms of creditor protection for IRAs).  The Service stepped in, arguing it had priority on the IRA.  Frank countered, arguing that Section 6332(a) would give him the money.  The Section states:

Except as otherwise provided in this section, any person in possession of (or obligated with respect to) property or rights to property subject to levy upon which a levy has been made shall, upon demand of the Secretary, surrender such property or rights (or discharge such obligation) to the Secretary, except such part of the property or rights as is, at the time of such demand, subject to an attachment or execution under any judicial process.

Frank’s position was that his claim was the type of claim referenced by the “subject to an attachment or execution under any judicial process.”  The Court, however, held that the language did not direct which claim (that of the IRS or Frank) had priority, and only stated that the financial institution did not have to turn the funds over to the IRS.  The Court then looked to the other lien provisions, and found the IRS had priority and directed payment.

  • I went to see roller derby one time, which was really entertaining.  A perfect mix of roller skating and WWF.  All of the young women have funny/clever names, and often have slogans.  The announcer said of one that she had “champagne for her real friends, and real pain for her sham friends.”  Unfortunately, this has really nothing to do with this next case, except the tax court was dropping some real pain on a sham partnership.  In Bedrosian v. Comm’r, the Tax Court held that whether legal fees paid by a sham partnership were deductible was an affected item subject to TEFRA, and the Court had jurisdiction to make such a determination.  This was not the Bedrosians’ first Tax Court rodeo, and they keep making new TEFRA law, which now comprises a substantial chunk of revised Saltzman and Book Chapter 8 dealing with general exam procedures and a growing subsection dealing just with the complex world of TEFRA.

Gyorgy v Comm’r Tees Up Important Procedural issues

Today we welcome to the guest blogging ranks Peter Lowy, who is a member of Caplin & Drysdale. A nationally known tax litigator, Pete has also dedicated a significant amount of time on pro bono matters, for which he won the ABA Tax Section Pro Bono Award (now the Spragens Award) in 2003. In today’s post, Pete discusses the Seventh Circuit’s Gyorgy v Commissioner opinion. Gyorgy touches on a number of important procedural issues, including the record rule in CDP cases and last known address. Gyorgy has already been cited by the Tax Court in Adolphson v Comm’r for the proposition that a serial non-filer has a burden to show what address the IRS should have sent certain notices to at his or her last known address. Les

On February 27, 2015, the US Court of Appeals for the 7th Circuit decided a collection due process case, Gyorgy v. Commissioner, which tees up at least three important procedural issues. In this post, I will discuss those issues after summarizing the facts.


 The Facts

A thumbnail and streamlined sketch of the facts is as follows. The taxpayer, Gyorgy, had failed to file tax returns for years including 2002 and 2003, the years at issue on appeal.  The IRS made substitute returns for 2002 and 2003, and mailed notices of deficiencies to the address in its records, even though the IRS knew the address was incorrect since it had received returned undelivered mail as well as third-party information returns with one or more different addresses for the taxpayer.  After no petitions were filed in the Tax Court in response to the undelivered notices of deficiency, the IRS assessed.

Two years later, the IRS commenced collection proceedings, and mailed lien notices to the taxpayer—at his correct address. In response, the taxpayer filed timely requests for due process hearings before the IRS.  In its request, Gyorgy challenged the underlying deficiency and whether the IRS had followed its necessary procedures.  During the CDP process, Gyorgy provided no material information to the CDP officer, and the Appeals Office issued an adverse determination.  Gyorgy timely petitioned the Tax Court, where the Tax Court conducted a de novo review.  Gyorgy appears to have provided very little relevant evidence, and the Tax Court sustained the lien notices for tax years 2002 and 2003.  Gyorgy appealed to the 7th Circuit.

 The Issues

First, is judicial review in a CDP case limited to the administrative record? Prior to Gyorgy, several circuits had decided the issue but the 7th Circuit had not.  Consequently, the Tax Court, under its rule of Golsen, had applied its own rule in the absence of controlling precedent from the court to which the case was appealable.  On appeal, the 7th Circuit in Gyorgy had the opportunity to clarify the record rule for taxpayers in its geographic jurisdiction.  But the court punted instead, as it was not required to reach the issue on the record in Gyorgy’s particular case (it appears the taxpayer was afforded a full opportunity but failed to provide additional evidence or credible testimony to supplement the administrative record.  Whether review was limited to the administrative record or not should be academic).  Nevertheless, in its discretion, the 7th Circuit could have clarified the application of the record rule, which may have assisted the IRS and taxpayers confused about the extent of judicial review, and, thus, the level of due process to which they are entitled in a CDP appeal.

The lack of clarity that remains surfaces at least two policy questions for the record rule. One: whether there should be a uniform application of the record rule across circuits.  Without uniformity of application, different taxpayers will have different opportunities to challenge adverse IRS determinations and thus different levels of due process, depending upon where they reside.  Uniformity, however, may require legislative action unless the Supreme Court steps in.  Two: if a uniform law is adopted, should it limit or not limit review to the administrative record.  The main downside of limiting review to the administrative record is that it may lead to a more litigation-oriented and less resolution-oriented process because it would encourage taxpayers to load up the administrative record with all potentially relevant evidence in the event the matter is submitted for judicial review.  In practice, the resolution-mindedness of the process and parties involved has been a key quality to its success.

Second, on the last known address issues, what is a court’s standard of review in a CDP case in the context of a challenge to the assessment of the underlying liability on the grounds that the IRS failed to mail a notice of deficiency to the taxpayer’s last known address? The general rule is that when the underlying tax liability is properly at issue in a CDP hearing, the Tax Court reviews the underlying liability issue de novo, but reviews the Appeals Office’s other determinations for abuse of discretion.  Should the last known address issue, when raised as invalidating the underlying liability assessment, be viewed as part of the underlying liability determination, and accordingly subject to the de novo standard of review?  Not according to the 7th Circuit in Gyorgy.  In its opinion, the 7th Circuit cited two cases to support applying an abuse of discretion standard: Goza, a 2000 Tax Court decision, and Jones, a 2003 5th Circuit decision.  In Jones, the taxpayer failed to pay the tax shown due on its return, so a notice of deficiency was not a prerequisite to assessment.  In Goza, the taxpayer received notices of deficiency so could not contest the underlying liability or associated assessment in the CDP proceeding before the court.

At a minimum, there is a legitimate policy debate to be had on the proper standard of review. The rationale for de novo review of the underlying liability is that taxpayers that had not received a prior opportunity to petition the Tax Court should receive the same rights of review to which taxpayer’s would be entitled outside of the CDP context (but that the review should be conducted within the CDP process so that adjudication of the underlying liability does not materially delay the IRS’s collection action).  In a sense, the CDP process is a conceptually bifurcated but consolidated proceeding in which the taxpayer may challenge, in the first place, the assessment of the underlying liability.  Secondarily, the taxpayer may also challenge the proposed actions to collect the assessed liability if they are determined to be owed.  De novo review of all issues associated with adjudicating all matters related to the underlying assessment would afford the CDP petitioner the same rights as they would receive through other avenues of review—whether in Tax Court or in District Court where the taxpayer may challenge an assessment on last-known-address grounds and the District Court would review the issue without deference.  De novo review would also permit the taxpayer to obtain (and introduce as evidence) information from the IRS that is relevant to a last-known-address determination.

Third, how extensive is the IRS’s due diligence obligation to locate a taxpayer’s correct address when it knows or has reason to know that the taxpayer is not receiving mail at the address in its records? Under the law, taxpayers have a duty to clearly notify the IRS when their address changes, and the IRS has an obligation of “reasonable due diligence” to identify the taxpayer’s correct address when they know the address in their records is wrong.  In many last-known address cases, the taxpayer could have done a much better job at clearly notifying the IRS of their address change, and the IRS could have done more to locate the taxpayer’s correct address when it was obvious the address in their files was invalid.  In determining whether a notice was mailed to the taxpayer’s “last known address,” courts at times tend (as a practical matter) to balance the respective obligations that both taxpayers and the IRS have; however, different courts place more or less of the onus on one side of the balance or the other.

The 7th Circuit in Gyorgy determined that the IRS had met its “reasonable due diligence” obligation and thus the mailing address it used constituted the taxpayer’s last known address.  It may be important that Gyorgy’s facts, as portrayed in the 7th Circuit’s opinion, are unsympathetic.  He had failed to file returns for the tax years at issue and at least four subsequent years, had kept the IRS utterly in the dark about his whereabouts, and on the witness stand he even admitted that he moved around so much that his correct address was hard to keep track of.  The IRS’s records suggested that the postal service also did not have a more recent address than the address appearing on his last filed tax return—for tax year 2000.  The IRS had received returned mail from the address in its records as well as W-2 and 1099 forms for 2002 and 2003 that showed different addresses, but the IRS received no responses to R-U-There letters sent to at least one of those different addresses.  Based on these facts, the 7th Circuit did not require the IRS to expand its search for the taxpayer’s address beyond the IRS’s own records.

The 7th Circuit acknowledges in its opinion that it may have required less of the IRS to meet its due diligence obligation than other courts had in other cases.  It discussed a leading case out of the 5th Circuit, Terrell v. Commissioner, in which the 5th Circuit required the IRS to expand its investigation to at least certain accessible sources, which may include DMV records, or contacting the taxpayer’s employer or return preparer. These are among the sources the IRS routinely consults when attempting to collect taxes, so why shouldn’t it take these steps when notifying taxpayers of important rights?  The facts of Terrell, however, are distinguishable for many reasons including that the taxpayer had filed tax returns and taken reasonable although imperfect steps to allow the IRS to know her correct address.  The 7th Circuit expressly declined to decide whether it should categorically reject Terrell or should follow Terrell if presented with a similarly sympathetic set of facts.

A question readers may wish to consider is whether the juxtaposition of Gyorgy and Terrell represents a developing circuit split on whether the definition of “reasonable due diligence” requires investigation into records not currently in the IRS’s possession when the IRS knows the mailing address in its records is wrong; or whether the differences in the cases reflect that the “reasonable due diligence” standard calls for a pragmatic, fact-driven approach that may be influenced at least partly on the reasonableness of the taxpayer’s efforts; or whether it suggests something else entirely.


In summary, the posture of the Gyorgy case placed three procedural issues in the 7th Circuit’s hands.  Although the court punted on the record rule, it raised relevant and worthwhile points on all three issues, which readers may wish to weigh in on.

Editor Update

Jack Townsend’s Federal Tax Procedure Blog also has a nice write up of the case, where he raises a practical question as to why a nonfiler would want to raise the last known address issue: “ In the case, Gyorgy filed no tax returns, so, even if he prevailed on the issue of last known address, the IRS still has the ability to assess.  (I presume that he did not do the § 6020(a), here, substitute for return which he signed, thus making it a return.)”