“Can’t anyone here play this game?”

Commenter in chief, Bob Kamman sent another order stricken by the Tax Court offering another chance for a lesson in what not to do.  He also offered the title of today’s post as he quoted from a beloved baseball manager of yesteryear, Casey Stengel.  The Tax Court had calendared the case of Sneider-Pedon v. Commissioner, Dk. No. 33172-21 resulting in an order from the assigned trial judge rather than the Chief Judge.

Petitioner here sought relief from the denial of innocent spouse relief but as the order indicates, she attached a notice of determination for only one of the years she mentions in her petition.  This causes problems at the case resolution stage and points out again that the Court pays careful attention to the documents giving the Court jurisdiction and the document resolving the case.

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In response to a proposed decision document, the Court entered the following order:

BARBARA J. SNEIDER-PEDONE, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent 

Docket No. 33172-21. 

ORDER This case was called from the calendar for the Trial Session of the Court at Cleveland, Ohio on November 7, 2022. In the Petition, filed October 18, 2021, petitioner disputed respondent’s denial of relief from joint and several liability under section 6015 for tax years 2012 and 2013. However, petitioner attached the Notice of Determination only for tax year 2013, not for tax year 2012. Neither party has since remedied this omission, so we remain unsure whether petitioner’s claims regarding tax year 2012 are validly at issue in this case. On November 4, 2022, respondent filed a Status Report to inform the Court that a basis for settlement had been reached. On November 7, 2022, the parties filed a Settlement Stipulation and a Proposed Stipulated Decision. The Settlement Stipulation contains petitioner’s Statement of Account (Form 3623) for tax years 2012 and 2013, prior to any relief that she may be granted under section 6015. The Proposed Stipulated Decision proposes to remove petitioner’s “deficiency” for tax years 2012 and 2013 and to find an overpayment for tax year 2012. The Petition requests declaratory relief under section 6015, not a redetermination of deficiency. Indeed, there is no notice of deficiency before us in this case. Therefore, any proposed stipulated decision must refer to “relief from liability,” not to a reduction of deficiency. 

Accordingly, we will strike the Proposed Stipulated Decision and give the parties 30 days to file a corrected proposed stipulated decision that conforms to the relief requested in the Petition. Upon due consideration, and for cause, it is 

ORDERED that this case is continued and that jurisdiction is retained by this Division of the Court. It is further  

ORDERED that the parties file a status report by December 19, 2022, containing petitioner’s Notice of Determination for tax year 2012. It is further 

ORDERED that the parties’ Proposed Stipulated Decision, filed on November 7, 2022, is hereby stricken from the record. It is further 

ORDERED that by December 19, 2022, the parties file a corrected proposed stipulated decision that conforms to the relief requested in the Petition. 

Petitioner in this case filed her petition pro se.  That almost always means that the Chief Counsel attorney prepared the decision document.  Here, the decision document includes a year for which the Court cannot be certain that it has the ability to render a decision.  Without the ticket to Tax Court, here a notice of determination, the Court lacks the ability to confirm that petitioner has properly invoked its jurisdiction. 

It’s not unusual for a petitioner to fail to attach the document serving as the ticket to Tax Court.  If petitioner fails to attach that document, it falls to Chief Counsel attorney to file the document or move to dismiss.  Here, petitioner included an appropriate determination for one year but not the other.  No one raised an issue concerning the dissonance between the years listed in the petition and the year reflected on the decision document until the Court challenged the document.  Overlooking this dissonance is fairly easy but should be on a checklist the Chief Counsel attorney would have in preparing the answer and the reviewer should have in reviewing the answer.  So, something fell down in the Chief Counsel office.

The second mistake reflects a deeper problem because it suggests that the Chief Counsel attorney did not understand the nature of the case.  Because petitioner pursued the case pro se, she would not be expected to understand the difference between a deficiency and a determination.  The same cannot be said for the attorneys in Chief Counsel’s office.  The document presented to the Court would have been prepared by Chief Counsel’s office which has access to templates covering this situation.  Perhaps the language of deficiency versus relief from liability merely reflects a failure to select the proper template for use in preparing the document but it also reflects either a more fundamental misunderstanding of the different types of innocent spouse cases or the nature of innocent spouse cases.  Some type of additional training seems in order but perhaps that training has come in the form of a public rebuke from the Court in rejecting the proposed document.

Chief Counsel has been hiring lots of new attorneys.  It takes some time to understand the nuances of the practice which is why every document that goes out the door gets reviewed by a manager in that office.  Here, the failed document appears to result from a docket attorney that may not have understood exactly what was at issue and a review that did not take the time to check the determination passing that task along to the judge who had to provide feedback in a public manner.

The posts on bloopers results not from any empirical study suggesting that Chief Counsel’s office makes more mistakes now than in the past.  I can attest that it made plenty of these kinds of mistakes when I worked there both as an attorney and as a manager.  Hopefully, we can continue to learn from them.  As I have written in prior posts I had my fair share of painful bloopers over the years.

Deemed Stricken

Commenter in chief, Bob Kamman, recently alerted us again to orders from the Tax Court in which the Court rejects the filings by the parties because of mistakes in the filings.  This is not the first time he has noticed mistakes in filing documents at the Tax Court.  I wrote a pair of posts, here and here, about mistakes Bob identified last year.

As I mentioned in one of the prior posts, at Chief Counsel’s office the Procedure and Administration Division of the National Office, and its predecessor the Tax Court Division, kept track of Tax Court bounces when I worked there.  Bounces were not a good thing since they signified that the local office had made a mistake in filing a document with the Court.  Not only did the national office let you know when a bounce occurred, but whenever there were intra-Chief Counsel office CLE programs, the speaker from the national office would present a 10-15 minute monologue describing the bloopers produced by the field offices over the past year or so.

The mistaken filings often involve matters filed by both the Chief Counsel’s office and the petitioner (or petitioner’s counsel).  It’s possible to see some of these bloopers by following the Court orders.  Bob found them using a search in the orders for “deemed stricken.”  I will talk about one order in this post and occasionally come back to these types of orders as we identify them.  These orders usually provide a lesson on what not to do in a case.  Those lessons, while generally painful, can be useful.

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The case I will discuss today involves a proposed decision document.  The Court rejects the document.  In this blog we sometimes criticize the Court for the slowness with which it delivers opinions, but it’s easy to forget that the judges have many tasks which they must perform with care.  While they rely on the litigants to assist them, they must constantly check behind the litigants to make sure that even where the litigants agree, the matter presented is correct.  Chief Judge Kerrigan found that the agreed decision document the parties requested she sign did not reach her desk with the appropriate background.  Here is the order:

JESSICA YADIRA GADDIE, Petitioner

v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 12604-22 

ORDER

On November 21, 2022, the parties filed a Proposed Stipulated Decision for the Court’s consideration. However the deficiency proposed therein for the 2018 taxable year, $5,173.00, is more than the deficiency determined for that year in the Notice of Deficiency, $3,449.00. Respondent did not assert an increased deficiency in the Answer and nothing below the line in the Proposed Stipulated Decision accounts for the increase. Accordingly, the Court is unable to process the parties’ Proposed Stipulated Decision.

For cause, it is

ORDERED that the Proposed Stipulated Decision, filed November 21, 2022, is hereby deemed stricken from the Court’s record in this case. It is further

ORDERED that the parties shall, on or before December 20, 2022, file a revised Proposed Stipulated Decision.

The Gaddie case, like 75% of the Tax Court’s cases, was filed pro se.  She filed her petition on June 6, 2022 and the Chief Counsel attorney filed an answer on June 23, 2022.  That is amazingly quick for an answer reflecting that the Tax Court had solved it delays in providing petitions to the IRS and that the attorney or paralegal in the Dallas office of Chief Counsel assigned to the case was on top of their docket.  The next entry in the case is the proposed stipulated decision.  The docket sheet indicates that the proposed stipulated decision was filed on November 21, 2022 as stated in the order copied above. 

The order striking the document from the record was entered just two days later which means the order received a very quick review.  Since the case had not yet appeared on a calendar, I would have expected the case to be in the general docket of the Court unassigned to a specific judge; however, the order here was entered by Chief Judge Kerrigan as mentioned above.  Perhaps decision documents get assigned out of the general docket.  I do not know whether the mistake here was detected by someone in the records section of the Court, the Chief Judge’s staff, or the judge.  Someone, however, paid close attention to the document filed and the notice of deficiency.

The order points out that the IRS seeks to obtain a larger assessment against Ms. Gaddie than the IRS put into the notice of deficiency.  One of the dangers of filing a Tax Court petition is that the filing places the case in the hands of a Chief Counsel attorney who may notice mistakes on the return that the auditors did not notice.  While the Independent Office of Appeals has a policy of not raising new issues which would increase the amount of the deficiency, the Office of Chief Counsel does not have such a policy and regularly seeks increased deficiencies if it identifies a mistake.  In the Tax Court case the IRS can seek an increased deficiency.  For this reason, before filing a petition you must think about the possible downsides as well as the upsides. 

While the proposed stipulated decision would not typically discuss the reason for an increased deficiency, this proposed stipulated decision clearly creates an increased deficiency.  The Court notes the increase but strikes the document because the IRS never asked for the increase.  The IRS needed to ask for the increase in the answer or in an amendment to the answer if it wanted to recover an amount in excess of the deficiency listed in the notice of deficiency.  I cannot see the answer without taking steps I am unwilling to do for purposes of this post, but I can see from the docket sheet that the IRS did not file an amendment to the answer.  I assume that in the answer it so quickly filed in this case it did not seek to recover additional amounts of tax above the amounts listed in the notice of deficiency.

The Court also knows that because Ms. Gaddie is pro se she may not have an appreciation for what the IRS should do if it wants to obtain an increase in the deficiency it set forth in the notice of deficiency.  Striking the proposed stipulated decision now places the IRS in a position of filing a new document seeking a decision in an amount equal to or less than the amount in the notice of deficiency or filing a motion seeking permission to amend its answer.  In the motion it will need to explain the reason for the increased deficiency and Ms. Gaddie will have the opportunity to agree or oppose the motion.  The Court will have the opportunity to know that Ms. Gaddie understands the increased amount and the Court will have the ability to satisfy itself that the amount listed in the proposed stipulated decision is not a typo or mistake of another kind.

It’s great that the Court looks out for these types of mistakes.  The order here provides a lesson to the Chief Counsel docket attorney on how to obtain an increased deficiency and the care with which a stipulated decision must be drafted.  We get the opportunity to observe what appears to be a blooper and to be thankful for the care and time the Court devotes to making sure that cases before it end correctly.

A Checklist for Approval of Stipulated Decisions

We welcome back Commenter in Chief Bob Kamman who has been looking at Tax Court orders returning (bouncing) decision documents to the parties. Today, Bob looks at orders from eight days in November.  I will follow up in the coming days with a more detailed discussion of some of the orders.  You will be struck by how many mistakes the parties make in submitting decision documents.  Because these documents are generally prepared by Chief Counsel attorneys and because so many taxpayers are pro se, the post suggests additional training is needed for the Chief Counsel attorneys.

This post addresses orders regarding stipulated decisions, but we want to note that this morning the Tax Court has already begun issuing what will be a deluge of orders dismissing the approximately 400 cases being held in abeyance pending the outcome in the Hallmark case decided yesterday.  A team will be carefully reviewing each order and taking steps to protect the interest of petitioners with viable equitable tolling arguments.  Keith

You have avoided the hazards of further litigation by agreeing to a settlement with IRS in a Tax Court case. Now comes the final step of what should be easy but seems difficult: getting the stipulated decision past the eagle eyes of the judge who must sign it. Have rejections of these become more frequent this year? Has the quality of Chief Counsel paperwork diminished? Does this have something to do with the Tax Court changing the top line on its orders from 12-point Times New Roman to 20-point Gothic-style Archive Black Title, similar to the mastheads of the Washington Post and New York Times?

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My guess is that the judges have a checklist, but Chief Counsel does not. Petitioners, represented or not, can assist the Court by learning from the mistakes of others. The following are from orders issued in the eight business days between November 14 and November 23, 2022. Petitioner surname and docket number are shown. All of them order that “the Proposed Stipulated Decision is hereby deemed stricken from the Court’s record in this case.” Unless otherwise indicated, the order came from Chief Judge Kerrigan.

Gaddie, Docket No. 12604-22: On November 21, 2022, the parties filed a Proposed Stipulated Decision for the Court’s consideration. However the deficiency proposed therein for the 2018 taxable year, $5,173.00, is more than the deficiency determined for that year in the Notice of Deficiency, $3,449.00. Respondent did not assert an increased deficiency in the Answer and nothing below the line in the Proposed Stipulated Decision accounts for the increase. Accordingly, the Court is unable to process the parties’ Proposed Stipulated Decision.

Shoemaker, 1793-22: On November 22, 2022, the Court received from the parties in the above docketed matter a Proposed Stipulated Decision resolving this litigation. That decision was premised on a Settlement Stipulation filed the same date purportedly establishing an overpayment for the underlying 2020 taxable year. However, review shows that the Settlement Stipulation fails to attach the Statement of Account referenced therein reflecting such overpayment. (Similarly, Dudeck in 29676-21S, noting that this is Form 3623; and Lockwood, 2379-22S, both Judge Leyden. )

Sletten, 29431-21 (Judge Copeland): On November 9, 2022, the parties filed with the Court a Proposed Stipulated Decision (Index No. 9). Upon review of the Proposed Stipulated Decision, it was discovered that there was an incorrect docket number listed on the signature page. On November 18, 2022, the parties filed with the Court a corrected Proposed Stipulated Decision (Index No. 10).

Henderson, 35625-21S (Judge Landy): This case is scheduled for trial at the session of the Court to commence at Dallas, Texas on December 5, 2022. On November 16, 2022, the parties filed a Proposed Stipulated Decision (Doc. 11) which contained extraneous documents. The Court is therefore unable to process the parties’ Proposed Stipulated Decision.

Ordonez-Haggard, 1088-22S (Judge Choi): On November 18, 2022, the parties filed a Proposed Stipulated Decision document (index # 7). Upon review it was seen that on in [sic] the second paragraph indicating there is a penalty due from petitioner, the taxable year listed is 2018 instead of the taxable year at issue, 2019. Therefore, the Proposed Stipulated Decision document is erroneous, and we will strike it and instruct the parties to file a corrected one.

Kostelac, 9711-15 (Judge Paris): On October 28, 2022, docket entry 82, the parties filed a Proposed Stipulated Decision. The document had several inconsistencies, making the Stipulated Decision incorrect. Therefore, the Court will strike this document. On November 16, 2022, docket entry 83, the parties again filed a Stipulated Decision. This decision document appears to be correct, and the Court will accept and enter this Decision. On November 18, 2022, docket entry 84, due to an inadvertent clerical, the Court issued an Order to strike the Proposed Stipulated Decision document, filed October 28, 2022, docket entry 83. The Order which was intended for the case at Docket No. 9710-15, but instead was inadvertently filed in this Docket No., 9711-15. Therefore, the Court will strike the November 18, 2022, Order from the Court’s record for the case at Docket No. 9711-15.

Strickland, 19121-21S (Judge Landy): On November 18, 2022, the parties filed a Proposed Stipulated Decision (Doc. 17) which did not address the accuracy-related penalty pursuant to I.R.C. § 6662(a). The Court is therefore unable to process the parties’ Proposed Stipulated Decision.

Niedermayer,36207-21S (Judge Leyden): On November 18, 2022, the parties filed a Proposed Stipulated Decision. Upon review, it appears that the parties attached both the decision and the settlement stipulation in one document. Thus, it is an improper filing because the Settlement Stipulation and the Proposed Stipulated Decision shall be filed separately.

Rios, 8775-22S (Judge Landy): This case is calendared for trial at the Court’s Miami, Florida Trial Session, scheduled to commence on February 27, 2023. On November 10, 2022, the parties filed a Proposed Stipulated Decision (Doc. 8) which does not address the addition to tax pursuant to I.R.C. § 6651(a)(3). The Court is therefore unable to process the parties’ Proposed Stipulated Decision.

Yoozbashizadeh, 25837-21S (Judge Choi): This case was calendared for trial at the Court’s Los Angeles, California trial session, which was scheduled to begin November 14, 2022. On November 14, 2022, this case was called. There was no appearance by nor anyone on behalf of petitioner. Respondent’s Counsel appeared and was heard. At that time respondent informed the Court that on November 10, 2022, a Proposed Stipulated Decision (index #14) had been electronically filed with the Court. The Court then informed respondent that petitioner’s signature was typed and that an original signature was needed. Respondent agreed, therefore the Proposed Stipulated Decision filed by the parties on November 10, 2022, (index #14) is erroneous and we will strike it.

Stuhlman, 6504-20S (Judge Nega): This case was calendared for trial at the session of the Court conducted in person on Tuesday, September 6, 2022, in Fresno, California. On July 10, 2020, petitioner filed the petition commencing this case. In that petition, petitioner requested that the Court proceed with this case under the Court’s small tax case procedures. On November 16, 2022, the parties filed a Proposed Stipulated Decision. The caption of that decision reflects the correct docket number associated with this case but failed to include the “S” designation. (Similarly, Burke, 31804-21S, Judge Leyden.)

McBride, 34784-21S (Judge Copeland): On August 31, 2022, the parties filed with the Court a Proposed Stipulated Decision (Index No. 10). Upon the Court’s review, an error was noticed. The Proposed Stipulated Decision stated that there was no penalty for taxable year 2018 under I.R.C. Section 6651(a)(2) and should have stated that there was no penalty for taxable year 2018 under I.R.C. Section 6651(a)(1). On November 16, 2022, the parties filed with the Court a corrected Proposed Stipulated Decision (Index No. 13).

Martin,7427-22: By Order served August 26, 2022, the Court directed petitioner to pay the Court’s $60.00 filing fee on or before September 23, 2022. To date, the Court’s filing fee in this case remains unpaid. Upon due consideration and for cause, it is ORDERED that the parties’ Proposed Stipulated Decision, filed August 25, 2022, is hereby deemed stricken from the Court’s record in this case.

Loper, 2492-22: On November 16, 2022, the parties filed a Joint Proposed Stipulated Decision. Upon review of the proposed decision, the Court notes that petitioners signed the proposed decision using a cursive font. The Court does not accept for electronic filing a stipulated decision that contains a stylized signature such as one using a cursive font. See Rules 23(a)(3); Frequently Asked Questions About DAWSON.

Leo, 32671-21S (Judge Landy): On October 26, 2022, the parties filed a settlement stipulation and proposed stipulated decision at Doc. 8 and 9. Upon review of the settlement stipulation and proposed stipulated decision, the Court was concerned whether the notice of deficiency (notice) for the taxable year at issue underlying this proceeding was valid. The settlement stipulation suggested that the deficiency was paid prior to the issuance of the notice. By Order served October 27, 2022, the Court directed respondent to file either: (1) a report addressing and establishing the validity of the notice of deficiency for 2019, or (2) an appropriate jurisdictional motion. Respondent filed a response on November 9, 2022, attaching a complete copy of the notice. On November 14, 2022, respondent filed a Motion to Dismiss for Lack of Jurisdiction on the ground that the deficiency was paid prior to the issuance of the notice. Respondent’s motion stated that petitioners do not object to the Court granting this motion, and petitioners confirmed this statement on November 14 and 17, 2022.

Deverter, 8675-22: On November 10, 2022, the parties filed a proposed stipulated decision for the Court’s consideration. A review of that document discloses that it does not address a penalty under I.R.C. section 6662(a) that is set forth in the notice of deficiency on which this case is based and includes additions to tax under I.R.C. sections 6651(a)(1) and (a)(2) that do not appear to have been set forth in the notice of deficiency.

Wong, 20602-21 (Judge Foley): Upon review of the record, there are several typographical errors on the Proposed Stipulated Decision, filed November 10, 2022. Further, discrepancies exist between the Stipulation of Settlement, filed November 10, 2022, and the Proposed Stipulated Decision.

Conrad, 17750-21: On November 10, 2022, the Court received from the parties in the above docketed matter a Proposed Stipulated Decision purporting to resolve this litigation. However, review reveals multiple shortcomings. First, there is a typographical error in one of the references to the 2018 taxable year. Second, the decision appears to deal with a penalty under section 6662(b)(1) of the Internal Revenue Code, whereas the underlying notice of deficiency involves section 6662(b)(2), I.R.C. Third, the signature block does not reflect the current address of record for petitioner.

Brevil, 29919-22: On November 3, 2022, the parties filed for the Court’s consideration a proposed stipulated decision. By Order served November 7, 2022, the Court removed the small tax case designation and amended the docket number by deleting the “S”. On November 10, 2022, the parties filed a revised proposed stipulated decision.

Gallegos, 1177-22S: On November 15, 2022, the parties electronically filed a Joint Proposed Stipulated Decision and a Joint Settlement Stipulation. Upon review of the proposed stipulated decision, the Court notes that the overpayment amount is incorrect.

Ritchings, 4261-22S: On November 9, 2022, the parties filed a Proposed Stipulated Decision (Doc. 15) which states a deficiency for taxable year 2018, not 2019, and the decision does not address the accuracy-related penalty, pursuant to I.R.C. § 6662.

Licorish, 3524-22S: On November 10, 2022, the parties filed a Settlement Stipulation and a revised Proposed Stipulated Decision. However, upon review of the former, the Court notes that the Settlement Stipulation appears to be a duplicate of the Settlement Stipulation filed October 11, 2022, at Docket Index No. 5. Upon review of the latter, the Court notes that the proposed decision document references an I.R.C. section 6662(a) penalty. Conversely, the underlying Notice of Deficiency upon which this case is based does not. Moreover, the Court notes that the proposed decision document does not address petitioner’s liability, if any, for the I.R.C. section 6676 penalty determined in the Notice of Deficiency.

Vailes, 27998-21 (Judge Ashford): On November 10, 2022, the parties filed a Proposed Stipulated Decision. However, on the same day, the Court entered and served on the parties an Order and Decision that resolved all issues in this case (reflecting the same terms as the Proposed Stipulated Decision) and this case was closed.

And so forth. These errors should be caught by attorneys or paralegals before documents are filed. I assume that Tax Court judges have clerks or administrative staff to review filings for obvious mistakes, but it wastes judicial resources when rejections must be signed by a Presidential appointee whose confirmation by the Senate was not based on proofreading skills.

I looked at a similar period during 2021. There were about as many “bounced” stipulated decisions, but often the reasons were different. Then-Chief Judge Foley caught cases, for example, where the stipulation and the decision were the same document, rather than separate ones as required. Or the “S” designation was missing from captions. Or the Notice of Deficiency was not filed, or its contents varied from the stipulation.

In the military, troops are sometimes ordered to “stand down,” taking a break from regular duties to address major operational concerns. Perhaps it is time for Chief Counsel to order a “stand down” for all personnel to review document preparation after a Tax Court case has settled.

Tax Court Issues Another 17-0 Ruling Regarding The Jurisdictional Nature Of Filing A Tax Court Petition

Today the Tax Court ruled in Hallmark v. Commissioner, 159 T.C. No. 6 (2022) that the time period for filing a petition in a deficiency case is jurisdictional.  The Court relies heavily on history and on 7459.  We will write more as we digest the full opinion but once again the Court does not find Supreme Court case law regarding jurisdiction, including the recent decision in Boechler, to deter it from the conclusion that the time period for filing a petition is jurisdictional.  The decision will no doubt set off litigation in the circuit courts around the country and may lead again to a decision by the Supreme Court which last time reversed the 17-0 decision of the Tax Court in Guralnik v. Commissioner with a 9-0 decision in Boechler.

Tax Court To Consider IRS Procedure For Imposing Information Reporting Penalties

In Information Return Penalty Assessment Fight Coming to a Head [$] Andrew Velarde highlights a major tax procedure issue before the Tax Court. It concerns allegedly improper IRS procedures with respect to the assessment of penalties associated with the delinquent or erroneous filing of information returns. As Velarde notes, in Farhy v Commissioner, the IRS assessed significant penalties under Section 6038 stemming from the taxpayer’s failure to File 5471 “Information Return of U.S. Persons With Respect to Certain Foreign Corporations,” for his Belize foreign corporations. The stakes of the case are high, with the potential for upending the IRS’s longstanding practice for imposing civil penalties for the failure to file certain information based returns.

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Farhy, a CDP case, squarely focuses on whether the IRS was entitled to use its summary assessment procedures with respect to the taxpayer’s failure to file the required Form 5471 for a number of years. A side question in the case is whether in a CDP case the IRS’s assessment authority with respect to the penalty is part of the requirement that the court verify that the IRS followed all applicable laws or a challenge to the underlying liability. Liability challenges are not properly before the court if the taxpayer has had a prior opportunity to challenge the determination. The government in Farhy has conceded that the taxpayer did not have a prior opportunity to dispute the penalty so that allows the Tax Court to proceed to the substantive legal issue.

Back to the heart of the matter, and some context, simplified for purposes of this blog. The IRC provides that some tax penalties are subject to the deficiency procedures, requiring that the IRS assert the penalties in a stat notice or in pleadings in Tax Court for a case that is otherwise before the Tax Court. Other civil penalties are explicitly identified in the Code as “assessable penalties” provided in Subtitle F, Chapter 68, Subchapter B. These are found within §§ 6671-6725 and are not subject to the Code’s deficiency regime.  IRC 6665(a) provides a similar statutory hook for penalties found within Subchapter A of Chapter 68.

For penalties in Chapter 68 the IRS is entitled to use its summary assessment powers, meaning that the IRS can assess those penalties immediately upon receipt of the taxpayer’s return.

What makes this case interesting and important is that the Section 6038 penalty is not found within Chapter 68 and is also not (at least explicitly) subject to the deficiency procedures.

The taxpayer in Farhy asserts in its opening brief that for decades the IRS has been acting ultra vires by using its summary assessment powers when the proper course is to refer the 6038 penalties to the Department of Justice “for collection like other tax judgments.”  While Farhy involves an assessment with respect to Section 6038 and the failure to file Form 5471, as the brief notes the same issue presents itself with other penalties that are located outside Chapter 68, including:

  • Section 6038A: Information returns required for certain foreign-owned U.S. corporations (Form 5472); the associated penalty is in the text of section 6038A all in Chapter 61 all in Chapter 61 (Information and Returns (§§ 6001 to 6117);
  • Section 6038B: information returns required for certain transfers to foreign persons (Forms 926 and 8865); the associated penalty is in the text of section 6038B all in Chapter 61 (Information and Returns (§§ 6001 to 6117);
  • Section 6038C: Information returns required for certain foreign corporations engaged in U.S. business (Form 5472); the associated penalty is in the text of sections 6038C all in Chapter 61 (Information and Returns (§§ 6001 to 6117);
  • Section 6038D: Information returns regarding foreign financial assets (Form 8938); the associated penalty is in the text of section 6038D all in Chapter 61 (Information and Returns (§§ 6001 to 6117);

Prior to this case, a number of commentators and practitioners have written that collection of the Section 6038 penalty and similar non Chapter 68 penalties can only be accomplished via referral to the Justice Department and litigation. See for example Robert Horwitz, Can the IRS Assess or Collect Foreign Information Reporting Penalties? TAX NOTES TODAY (Jan. 31, 2019) 301-305. Others, including Frank Agostino and co-authors Phil Colasanto and Inhyuk Yoo, have concluded that the assessments are improper and have claimed that the Section 6038 penalty should be considered an “additional amount” under Section 6214(a) and subject to deficiency procedures. A nice summary of the critical commentary can be found on pages 123 and 124 of the 2020 NTA Annual Report to Congress; NTA Erin Collins, prior to her appointment, was one of the first to highlight the issue in a 2018 Tax Notes article she wrote with Garrett Hahn.

The argument that the collection of penalties is required to be accomplished via DOJ referral turns in large part on the placement of the information reporting penalties outside Chapter 68 of the Code. It seems that the key assumption for that argument is that immediately assessable penalties are limited to those explicitly identified in Chapter 68.

I confess to not having given the issue my full attention, in part because my assumption has been that absent a specific Congressional requirement the IRS has discretion to summarily assess and in effect use whatever process it chooses, subject to very weak procedural due process limitations that would allow for a taxpayer, following full payment, to bring a post payment refund suit. (As an aside: the procedural due process treatment of taxpayers is a separate issue and one which I have written about and discussed most recently here, where I presented on the issue at the 2021 Center for Taxpayer Rights International Conference on Taxpayer Rights; Keith has also discussed the procedural due process issue in tax penalties in Assessable Penalties Do Not Violate Due Process).

My prior statutory take on this issue is that the default, absent special Congressional direction, is the summary assessment procedure that IRS has been using. To be sure, Congress has occasionally spoken and required additional process prior to assessment. For example a century ago Congress injected the deficiency notice and pre-assessment review procedures, and in 1998 Congress (albeit sloppily) provided that no assessment for some Title 26 penalties is valid unless there was adequate written supervisory approval.

All of this focuses attention on Section 6201, which provides the IRS broad authority to assess taxes, providing that the IRS via delegation “is authorized and required to make the inquiries, determinations, and assessments of all taxes (including interest, additional amounts, additions to the tax, and assessable penalties) imposed by this title…”

As Professor Bryan Camp shared with me via email, the wording of Section 6201 supports the Service view that it can use its summary assessment power with respect to the non-Chapter 68 information reporting penalties:

In looking at 6201, the word “including” is the important word to the analysis.  The parenthetical instructs us that the word “taxes” is to be broadly construed to mean liabilities other than taxes.  Examples of such liabilities are given in the parenthetical, but the word “including” tells us that what is listed in the parenthetical is not to be read as the exclusive set of liabilities that count as “taxes” within the scope of 6201. 

In its opening brief the government makes a similar argument:

The parenthetical reference in section 6201(a) to taxes “including . . . assessable penalties” includes the section 6038(b) penalty. As recently recognized by this Court, whether a penalty falls within the meaning of the term “taxes” as used in section 6201(a) is dependent on context. Grajales v. Commissioner, 156 T.C. 55, 61 (2021). Rather than limit the definition of “taxes,” the parenthetical reference in section 6201(a) includes “interest, additional amounts, additions to the tax, and assessable penalties,” which demonstrates that Congress intended to use “taxes” in an expansive sense rather than a narrow one. The modifier “all” preceding “taxes” also reflects that Congress intended to define the “taxes” to be interpreted under the broadest construction. The only limitation to respondent’s broad assessment authority under section 6201(a) is to limit that authority to assessments imposed under Title 26.

The dispute at issue highlights the labyrinth of the statutory authority to assess taxes and penalties. For example, Section 6202 addresses the process “mode or time for the assessment of any internal revenue tax (including interest, additional amounts, additions to the tax, and assessable penalties).” 6202 notes that the IRS “may” (but is not required) to establish a process for assessment if it is not otherwise mandated.

So IRS and Treasury could and should mandate additional procedural protections in connection with Section 6038 and similar penalties. Practitioners and the NTA have flagged the difficulties with the information penalty process, including what appears to be the IRS’s disregarding of apparent claims of reasonable cause and a high abatement rate for the penalties. These are serious problems that impinge on taxpayer rights and merit legislative attention. In fact the NTA has recommended that Congress extend deficiency procedures for these penalties, and others (including Keith), have highlighted how Congress needs to modify the Flora rule, which effectively keeps some taxpayers from ever getting the chance to get court review of potentially crippling penalties.

In any event, now that this issue is teed up in a case, we can expect to see the Tax Court’s take on what is looming to be one of the biggest issues in tax procedure and tax administration in 2023.

For those who want to dig deeper, the government and taxpayer opening briefs can be found here and here, and the response briefs can be found here and here [$$$$].

Dismissal of Late Filed Petition in a Post-Boechler World

In Carroll v. Commissioner, Dk. No. 11753-20L the Tax Court entered an order on November 16, 2022, dismissing a late filed petition.  Both respondent and the Court did everything I would expect leading up to the dismissal.  Petitioner, proceeding pro se, did not respond.  So, it is unknown if she had a basis for equitably tolling the time for filing the petition.

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I have not read the pleadings in the case.  As a result, this post is based on some guesses and information available publicly (without payment or significant delays) in the orders of the Court.

Petitioner appears to have filed her Collection Due Process petition late.  This case was filed on September 21, 2020, well before the decision in the Boechler case.  On November 9, 2020, the IRS filed a motion to dismiss for lack of jurisdiction.  The Court ordered a response to the IRS motion and petitioner requested more time.  At some point the case was probably suspended pending the outcome of Boechler.  Because the motion was still pending when the Boechler decision came out, the Court issued an order on May 9, 2022, denying the motion to dismiss for lack of jurisdiction and directing the IRS to file an answer.  It did.

In answering the petition, the IRS made affirmative allegation in paragraph 8 of its answer.  When the IRS makes affirmative allegations, a petitioner has a chance under Tax Court Rule 37 to file a reply admitting or denying the affirmative allegations in the same way the IRS would admit or deny allegations in its answer. 

Here, petitioner did not file a reply.  Rule 37(c) allows the IRS to file a motion requesting to have its affirmative allegations deemed admitted.  The IRS did exactly that in this case within the appropriate time frame.  Although the Tax Court could deem the allegations admitted without any further action, in my experience, it always issues an order pointing out to the petitioner the consequence of not filing a reply and offering the petitioner the opportunity to file a reply in response to the order.  The Court issued an order on August 8, 2022, giving petitioner until September 6, 2022, to file a reply.  She did not.

On September 26, 2022, the IRS filed a motion for judgment on the pleadings.  The Court ordered petitioner to respond to this motion by October 18, 2022.  She did not respond.  The Court held a hearing on November 15, 2022, on the IRS motions.  It then entered the order on November 16, 2022, dismissing the case.

There is nothing unusual about this case but it is the first post-Boechler case in which I have seen an order following exactly the process that I expect to take place now that the time for filing a petition in a Collection Due Process (CDP) case is acknowledged to not be a jurisdictional time frame.  The IRS filed its answer with affirmative allegations regarding the lateness of the filing of the petition.  Although I have not seen the IRS answer, I expect that it provides the date of the issuance of the CDP determination letter and the date of the filing of the petition noting that more than 30 days elapsed.  The IRS followed up after filing the answer appropriately by moving to have its affirmative allegations deemed admitted under the Rule 37(c) process.  The Court gave petitioner every opportunity here to provide an explanation and she did not.  Dismissal was appropriate.

I anticipate that we will see a lot more Rule 37(c) motions going forward.  Pro se taxpayers don’t understand the provisions calling for a reply, or their obligation under Rule 39 to plead facts in the reply giving rise to equitable tolling as an affirmative defense to the statute of limitations argument raised by the IRS in the answer.  Many will take advantage of the first (or second) time period provided by the rule or a court order and explain why the petition was filed late.  Those petitioners will receive a hearing on the reasonableness of their excuse.  Some petitioners will fail to respond and face an outcome similar to Ms. Carroll.  Unless Chief Counsel’s office gets a lot more diligent about monitoring the timeliness of the filing of petitions, something that I expect will happen, there will also be cases where the failure of Chief Counsel attorneys to do what the attorneys did in this case will result in a waiver of the timeliness argument allowing the lucky late filing petitioners to keep their case in Tax Court despite the tardiness of the filing of the petition.

I expect that the Chief Counsel attorneys have received instructions on how to handle a late filed case and the attorneys in the Chicago office followed that playbook perfectly here.  If those instructions have not been issued, the Chief Counsel attorneys now have a case template they can follow.

Robots Are Not the Only Problem and Disbarment News

On October 24 we posted about IRS efforts to free up phone lines by filtering out the robocalls.  To the extent that the post, which was inspired by a listserv posting by Barbara Heggie, raised hopes for a smoother path to the IRS through the phone lines, Barbara was back on the listserv on Wednesday, October 26 dousing those hopes.  Here’s Barbara’s graphic description of her experience trying to call that day:

it took eight tries to get placed on hold, even with a couple of them involving various tests of my humanity. Today, it took twenty-five, and most of them started with the quiz bot.

As the minutes wore on, I realized that this particular bot needs an annoying amount of time to determine whether I’m one of them or one of us. In fact, quizzing me on my math skills, auditory processing, and recall ability takes exactly twice as long, on average, as the non-quiz bot version of PPS purgatory – one minute, rather than thirty seconds.

I do admit to a tiny shot of dopamine whenever I get the math question right, but the thrill wears off by about Dial #20. And because I had to stay mentally nimble, I couldn’t check out and focus on something else for those precious extra seconds.

Yesterday was grumble-worthy; today was aggravating, particularly because the call dropped just as my PPS representative was giving me the numbers of the bank account where my client’s stimulus payments were deposited. Another twenty-six dials, and I’m in the queue again. Wish me luck.

It’s obvious from this message that robocalls are not the only problem.  Maybe $80 billion can fix this problem.  It would be nice to have calls get through without the problems described by Barbara and experienced by most of the readers of this blog.  While it’s nice to have math skills affirmed, it’s even nicer to reach someone to speak with about a problem without feeling that you have scaled Mount Everest just to get to the conversation.

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Discipline

Moving on from the fun topic of waiting to reach the IRS, we offer some possible additional reading material while you wait.  On October 26, 2022, the Tax Court issued its most recent list of attorney discipline orders.  Like most of these orders in the Tax Court, the three attorneys listed in this order are receiving discipline based on the reciprocal rules resulting from discipline in their local bar and not from something they did in a Tax Court case.  I have written about disciplinary matters several times in the past.  Here and here are posts from earlier this year.

The first case involving Paul Saul Haar seems a typical case of reciprocal discipline.  It struck me that he actually self-reported his state bar disciplinary action to the Tax Court which seems rare in my reading of these cases.  He failed to respond to the Tax Court’s show cause order causing his right to practice before the Tax Court to be suspended but with the right to apply for reinstatement.

The second case involving Isaac Henry Marks involved a situation in which it appeared the multiple bars in which he was admitted and the reciprocal discipline procedures of each proved too much for him to keep up with.  It appeared he may have had a minor trust account problem in DC causing disciplinary action there which triggered reciprocal discipline in Maryland, Kansas and the DC Circuit Court.  He got restored in DC relatively quickly but was still working out the reciprocal actions in the other jurisdictions.  The cascading impact of the first action appeared to be something he was having trouble getting in front of.

The third and final case involving David H. Miller was an easy case from the standpoint that he was convicted in Virginia of several serious crimes though not crimes which appeared to have any tax implications.  Disbarment here was an easy remedy to reach.  What struck me about this order was the requirement that he surrender to the Tax Court within 20 days his certificate of admission to practice before the Court.  The return of a physical document of this type seemed a bit archaic.  It was not required of the others who were disciplined but this was, by far, the most serious case and the one in which reinstatement seemed quite remote.  I wonder what the chances are that he will send in that physical document and what the consequences are of not sending it in.  It seems like his disbarment is complete without its return, but perhaps the physical document itself bears more importance than I would have imagined.

Chapter 11 Confirmation and Lifting of Automatic Stay

In Cochran v. Commissioner, 159 T.C. No. 4 (2022) the Tax Court decided in a precedential opinion that confirmation of a chapter 11 plan of reorganization of an individual does not lift the automatic stay imposed by BC 362(a)(8).  The decision reverses an earlier Tax Court decision issued before a crucial change in the law.  This decision will impact a small minority of individuals.  The situation has a fairly easy work around in most cases but still deserves some attention as a precedential opinion of the Tax court.

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Each year debtors file a relatively tiny number of bankruptcy petitions under chapter 11 of the bankruptcy code. For the 12-month period ending Sept. 30, 2022, there were 4,762 chapter 11 bankruptcy filings. In contrast, there were 229,703 chapter 7 filings and and 149,077 chapter 13 filings. Individual chapter 11 filings make up only a fraction of the total number of chapter 11 cases. For the the 12-month period ending June 30, 2020, there were only 464 filings. Of that minuscule number of individual chapter 11 cases only a much smaller number will have a pending Tax Court case.  So, this decision has a limited universe of impacted individuals.

Individuals seeking to reorganize their debts typically file chapter 13 cases because it is easier and cheaper to do so; however, some individual debtors cannot file in chapter 13 because of the amount of debt they owe.  Chapter 13 places dollar limitations on the debtors who can seek relief under its provisions.  The individuals who do not qualify for chapter 13 because of debts in excess of the limits can nonetheless seek reorganization through chapter ll.  That’s what the Cochrans did here.

After filing their chapter 11 petition, the Cochrans took all of the actions necessary to obtain a confirmation of their chapter plan.  At issue in their Tax Court case is the impact of obtaining a confirmed plan.  While I mentioned at the outset that the case involves the automatic stay imposed by BC 362(a)(8), the relevant sections for determining the impact of the plan on this provision of the automatic stay are BC 1141(d)(5) addressing the effect of a chapter 11 confirmation and BC 362(c) addressing the termination of the automatic stay.

Starting with the central Bankruptcy Code section at issue, it’s helpful to understand that BC 362(a)(8) is a bit of an outlier in the list of eight things that the filing of a bankruptcy case brings to a halt.  The automatic stay seeks principally seeks to protect the bankruptcy estate.  Once a debtor files bankruptcy, the debtor has sent up large signal flares that severe financial troubles exist.  it would create havoc if these signals caused creditors to come in an start picking apart the debtor’s assets.  So, the automatic stay generally requires creditors to stand back in order to allow for an orderly disposition of the estate.  Subparagraph (a)(8) was a late legislative addition to the list of stayed actions and has a different tenor than the others.  The principle purpose of (a)(8) was to keep the debtor from abandoning a Tax Court case because of lack of financial concern for the outcome.  The stay gives the trustee time to come in and protect the interest of all creditors by pursuing the case or, alternatively, postponing the Tax Court case so that the outcome is of concern to the post-petition debtor and no other creditors of the estate.

The reason for the existence of the stay, I think, drove the arguments of the petitioner in this case.  The Tax Court describes their argument as follows:

Petitioners also broadly cite Kovitch v. Commissioner, 128 T.C. 108, 112 (2007), People Place Auto Hand Carwash, LLC v. Commissioner, 126 T.C. 359, 363 (2006), and 1983 Western Reserve Oil & Gas Co. v. Commissioner, 95 T.C. 51, 57 (1990), aff’d, 995 F.2d 235 (9th Cir. 1993), for the proposition that an automatic stay under 11 U.S.C. § 362(a)(8) “should not apply unless the Tax Court proceeding possibly would affect the tax liability of the debtor in bankruptcy.”

The Court responded by stating:

These cases are distinguishable on the basis that they were concerned with ascertaining which entities related to a debtor should fall within the scope of 11 U.S.C. § 362(a).

Both the Court and the petitioners are right.  The Court is technically right that it does make a difference whether the debtor is an individual or an entity because the discharge provisions and there for the provisions dealing with the end of the automatic stay differ.  The petitioners are right that the reason for the creation of the automatic stay makes no difference in this case.  Since moving forward with the Tax Court case at this point does nothing to preserve the assets of the case or protect the petitioners as debtors, there is no point to using the automatic stay to keep the Tax Court case from proceeding.  The decision here, however, follows a unbroken line of Tax Court decisions strictly limiting its ability to move forward due to (a)(8) until a technical lifting of the stay occurs even if the stay does nothing to protect the debtor or the estate in the specific context of the case.

So, we have a code section that the Tax Court strictly interprets and one that says Tax Court cases stop when the automatic stay exists.  The parties agree that the automatic stay came into existence with the filing of the bankruptcy petition.  The legal disagreement, aside from the policy disagree discussed above, is the impact of the confirmation of the petitioner’s chapter 11 plan on the automatic stay.  The Tax Court gets the impact precisely right in a relatively short opinion. 

Under the version of the Bankruptcy Code enacted in 1978, the plan confirmation lifted the stay.  That outcome was reflected in the Tax Court’s earlier decision on this issue in Moody v. Commissioner, 95 T.C. 655, 658 (1990).  However, in 2005, during the last major change to the bankruptcy laws, Congress amended the relevant bankruptcy code section regarding the effect of plan confirmation in individual chapter 11 cases because of other changes it made principally regarding discharge.  It amended BC 1141(d)(5) addressing the impact of plan confirmation of the plan of individual debtors.  The provision now says confirmation does not discharge the individual’s debts and that discharge will not occur until some later time.

The amendment to the impact of the confirmed plan has an impact on when the stay comes to an end.  As already mention the stay came into effect with the filing of the bankruptcy petition.  In order to get around the prohibition of BC 362(a)(8), the Tax Court is looking to see if the stay has lifted to allow the case to move forward.  BC 362(c) provides the rules regarding the lifting of the stay and states that the stay is lifted at the earliest of the closing of the bankruptcy case, the dismissal of the bankruptcy case or the granting or denial of a discharge to the debtor. 

With the change to the effect of confirmation in an individual case, the plan confirmation does not impact discharge.  The confirmation of a plan does not close or dismiss the bankruptcy case.  So, nothing had happened in the Cochran’s bankruptcy case to trigger a lifting of the stay and BC 362(a)(8) sits there stopping the Tax Court case from moving forward even though at this point the Tax Court case will have no adverse impact on the bankruptcy.  The decision while technically correct does not serve any real purpose.

Instead of fighting about this with the Tax Court, it should be fairly easy in these type situations to convince the bankruptcy court to enter a specific order lifting the stay to allow the Tax Court case to move forward.  That’s the workaround.

Congress might consider putting more effort into drafting BC 362(a)(8) to define the situations in which the stay applies to the Tax Court in a way that has it apply only when it would be meaningful to do so.  I suspect, aside from the fact there is a relatively easy work around in most cases to this problem, Congress simply feels it has more important things to do.