Limited Appearance Rule Expands Access to Representation

We welcome first time guest blogger Attorney Karen Lapekas to Procedurally Taxing. Karen is the pro bono coordinator for the U.S. Tax Court Calendar Call Program for Miami. She was a Senior Attorney at the IRS Office of Chief Counsel before founding her own tax controversy firm. In today’s post Karen describes her experience with the Tax Court’s new limited entry of appearance rule, in a case we blogged here. Karen echoes the sentiments of guest blogger and pro bono attorney James Creech, who in a prior PT post urged the Court to permit limited entries of appearance at Calendar Call. Christine

Years ago, as an IRS Chief Counsel attorney, I watched an attorney file an appearance for a pro se petitioner during a Tax Court calendar call. The attorney had just met his client that morning. While witnessing this, I recall looking to my colleague and whispering, “Is he out of his mind?”  We shook our heads in admiration and disbelief. We understood the scale of the commitment. He was signing up not only for trial, but also for the most dreadful task that followed: preparing and filing briefs.

At that time, the attorney did not have the option of representing the petitioner for a limited amount of time. That was long before the Tax Court’s May 10, 2019 Administrative Order 2019-01. That well-received Order provides a procedure through which practitioners may represent a petitioner during a limited time period within a scheduled trial session.

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The Order provides that, with petitioner’s concurrence, a practitioner in good standing that is admitted to practice before the Court can file a Limited Entry of Appearance. He can do so by filing a form no earlier than the start of a scheduled trial session and by serving it on all parties.

Before the May 10, 2019 Order permitted a limited entry of appearance, a practitioner could enter an appearance in a case only by signing and filing a petition or by filing a standard entry of appearance. T.C. Rule 24. The entry of appearance stayed in effect until the end of the case or until the Court granted a practitioner’s request to withdraw. In other words, once a practitioner was in, he was in for the long haul. He was committed to the case until he filed, and was granted, a motion to withdraw. There was little flexibility for practitioners who wanted to assist a pro se practitioner at trial but could not commit to the unknown amount of work following the trial.

Now, a practitioner can limit his appearance to a specific date or dates during a scheduled trial session. (See Tax Court’s FAQ, here.) The limited appearance automatically terminates at the earlier of the specified day(s) or the end of the trial session (unless the Court directs an earlier termination). It can only be filed in person at the trial session. In fact, the Tax Court will strike any limited entry of appearance forms that are filed electronically or before the start of the trial session. If, after filing the limited entry of appearance, the practitioner wishes to end his appearance even sooner, the practitioner would have to ask the Court for leave to withdraw.

The Limited Entry of Appearance leaves open the possibility for a practitioner to later file a standard entry of appearance. A practitioner who files a standard entry of appearance or who filed a petition in the case cannot later file a limited entry of appearance (unless he was previously allowed to withdraw). Whereas, a practitioner may file a standard entry of appearance after filing a limited entry of appearance. This gives pro bono practitioners the option — but not the obligation — to represent petitioners beyond specific dates during the trial session.

The trial clerk will have copies of the Limited Entry of Appearance form at the trial session. Unlike a standard Entry of Appearance form, the Limited Entry of Appearance is signed by both the practitioner and the petitioner.

Prior to the Tax Court permitting limited appearances, as a pro bono attorney at calendar calls, I often felt like a coach to wary Gladiators before their first battle in the arena. I told them when to arrive, where to stand, how to present their case, and what they needed to prevail. However, at the end of the conversation, I could give no more than a figurative pat on the back and an encouraging “Go get em’ Tiger!” Without being able to actually show up for petitioners in Court, the only “win” I could achieve was mediating a settlement or encouraging them to settle the case on its merits (thus sparing them the time and stress of trial).

Yet, there were cases that needed to go to trial, either because there were sincere questions of fact or law, or because, in my opinion, the IRS was wrong. In those cases, despite urging them to go forward because they “had a good case,” I witnessed many petitioners concede. Without the support of an attorney by their side, they were either intimidated by the trial process or did not believe they could prevail against such a goliath.

The Limited Entry of Appearance form makes it easier for pro bono practitioners to represent petitioners. However, it does not address another problem I personally face as a regular volunteer and the one I overcame the first time I filed the form in Tax Court. That problem? Prejudice.

Being a regular volunteer at calendar calls has its pros. With experience, it becomes easier to approach a pro se petitioner, find the right words to assuage their fears, and pinpoint the sticking point keeping the parties from reaching an agreement. But it has one “con” that I consciously fight: the suspicion that most pro se cases that reach calendar call unresolved only do so because the petitioner either did not participate in the Branerton process or their arguments lack merit. While it’s true that the vast majority of Tax Court cases are decided in favor of the government, in the same way that a judge cannot fairly decide a case with this presumption, a pro bono attorney with this mindset may overlook a meritorious issue and cause a petitioner to be further disillusioned by the process or concede an otherwise winning case.

I am embarrassed to admit that when I first consulted with pro se petitioner, Eberto Cue, at the Miami Tax Court calendar call in November, I was eager to finish quickly and return to the office. Seeing that Mr. Cue had a CDP case and wasn’t disputing the liability, I expected to explain the abuse-of-discretion standard and how difficult it is to overcome. I expected to tell him that the tax lien would not be withdrawn, and he should save his time and concede the case.

However, just two minutes into Mr. Cue’s story, I knew that I would not be going back to the office for several hours, and I knew that Mr. Cue had nowhere else to be that day. Why? Because the IRS’s refusal to withdraw a lien against him caused him to lose his job and he was still unemployed. The IRS refused to withdraw a lien even though it agreed Mr. Cue was “currently not collectible.” Regardless, it insisted that it would only withdraw the lien if Mr. Cue  either paid the balance in full, entered into a full-pay installment agreement of $475 month, or he provide documentation showing he would lose his job if the Notice of Federal Tax Lien was not withdrawn. Mr. Cue provided the documentation demonstrating that he would lose his job. The settlement officer did not seriously consider it.  As of the date of calendar call, the lien remained, effectively preventing Mr. Cue from getting another job in the industry that he loved: banking.

It turns out, Mr. Cue was not optimistic about my meeting with him either. He indicated he had consulted with at least two other attorneys who told him that he should concede the case. He expected that I would try to convince him to do the same. Fortunately, neither of our expectations materialized. I quickly believed in a case that I had expected to dismiss, and Mr. Cue believed in an attorney that he expected would dismiss him.

The most important thing to know about the Limited Entry of Appearance is that it exists. At the November calendar call, that’s all I knew. Though I read the May 10, 2019 Order, I had not read it closely, nor had I brought with me a copy of the Court’s Limited Entry of Appearance form. I did not plan on actually using it — at least, not so soon! (The Tax Court actually does not expect practitioners to bring this form to trial sessions. It is not available on the Tax Court’s Forms page and the copy published with the Order has a watermark, so it can’t be used. The Court will have blank copies available at trial sessions.)

Thus, when Mr. Cue’s case was called for trial, I stood up, admitted my ignorance, but expressed my desire to enter a limited appearance. The form was in my hand in seconds and I was addressing the Court with an opening statement just minutes later. Three days thereafter, Mr. Cue sat in Tax Court and heard the Court conclude his case by reading aloud the following words,

“Therefore, a decision will be entered for the petitioner.”

I can’t say that my representation of Mr. Cue effected the case. But I do believe that having an attorney stand up, believe in him, and support his conviction that he suffered an unwarranted loss due to the settlement officer’s capricious dismissal of his arguments, gave Mr. Cue a bit of confidence to proceed. At the very least, I believe it renewed his confidence that the legal system works, and that justice does prevail, no matter how “small” a matter may seem. The option of filing a Limited Entry of Appearance made that possible.

IRS Must Implement Measures in Support of Small Businesses Through Coronavirus Pandemic

Since our last post on the Covid-19 emergency, much has happened. Today, first-time guest blogger Noah McGraw, J.D., E.A. reviews IRS options in light of the national emergency and argues for the extension of deadlines. I expect the IRS’s coronavirus response webpage to be updated shortly as the agency finalizes its response. In other news, the U.S. Tax Court has canceled its April trial sessions, and other courts are closing as well.

Unfortunately, tax issues associated with natural disasters will be important in the coming months. The ABA Tax Section has collected several resources here, including webinars and free access to the disaster chapter of Effectively Representing Your Client Before the IRS. We will highlight resources and ways our readers can help as events develop. Christine

As President Trump declares a National Emergency for the COVID-19 outbreak, this pandemic affects not only public health, but the health of the very engine of our economy, small business. We are beginning to see historic impacts from the Coronavirus on our country, and it would be in the best interest of the government and citizens to lessen economic damage by providing small business and self-employed taxpayers with much needed relief.

As of this morning the dedicated webpage, irs.gov/coronavirus, merely relays the Coronavirus will be covered by high-deductible health care plans. This will not suffice.

IRS protocol during any natural disaster should be used to allow taxpayers relief. IRM 25.16.1 provides thorough directives already in place with the Service that could be utilized for this crisis. The Service also recently declared that the citizens of Nashville would receive a reprieve after their recent tornado damage.

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While the Coronavirus pandemic may not bring physical destruction, as natural or other declared disasters, which have previously caused these rules to be invoked, the economic impact from the coronavirus will be a lasting effect felt for many months, if not years. The virus is already impacting small businesses across all industries, who have seen a reduction of revenue in only a few weeks’ time due to customer caution, fear, self- or government-imposed quarantine.

The retail, restaurant, hospitality, travel, and entertainment industries are among the hardest hit by the pandemic. These labor-intensive sectors require employment of individuals to perform work, and therefore their Form 941 payroll tax burdens may lead to layoffs. Further, once massive 941 penalties are assessed for failure to timely deposit, they often place small businesses in a financial tailspin.

Per IRM 25.16.1.1 3(a), “The objectives of the Disaster Program Office are to: a. ensure eligible taxpayers receive the appropriate level of federal tax relief when they are impacted by a federally declared disaster,” and “c. timely and effectively communicate IRS disaster relief decisions to external and internal customers.”

In consideration of the level of escalation experienced over the past week, now is the time for the Service to follow the guideline and provide taxpayers with relief on this latest disaster affecting the country.

The Service should invoke IRC Section 7508A (“Authority to postpone certain deadlines by reason of Presidentially declared disaster or terroristic or military actions”) for tax returns and liabilities at least until such time that the Coronavirus could be considered by relevant health experts to be “past the peak” of the outbreak. An additional 90 days beyond this peak would be even more helpful to those businesses who are facing extreme drops in demand for their services as individuals self-quarantine across the country.

This relief necessarily should include extending the filing date for individual and business income tax returns, the Quarterly filing date for businesses’ payroll returns, as well as the non-assessment of penalty and interest against taxpayers who are unable to meet the Federal Tax Deposit payment deadline, or the Estimated Tax payment deadlines.

Our focus as a country needs to be on the health and wellness of our immediate families and communities. If the Service does not establish a scheme of relief from penalties and interest, the economic impact to small business and employees will only be compounded. At this critical time, taxpayers do not need the additional stress of tax season and potentially racking up severe penalties and interest for not having the capacity to dedicate toward tax filings and timely payments during this historic and difficult time.

Coronavirus Cancels March Tax Court Sessions; New IRS Coronavirus Webpage

COVID-19 has hit the United States and developments are coming fast and furious. As the federal government seeks to reach a deal on a coronavirus aid package today, the IRS has created a webpage for coronavirus announcements and guidance, barred employees’ nonessential travel, federal tax filing deadlines might be extended, and much more. Bloomberg Tax reported today that the National Treasury Employees Union is concerned for employees and seeking to limit in-person help at Taxpayer Assistance Centers (link requires subscription). Meanwhile, tax professionals are struggling to find safe and effective ways to serve their clients who face serious hardships, or whose cases have deadlines that cannot be tolled or that have not yet been extended. Some VITA clinics have closed, and many firms and academic tax clinics have moved work online.

State and federal courts are taking measures as well, but policies vary widely from asking sick folks to stay home, to canceling all in-person court appearances. The U.S. Tax Court canceled its remaining March trial sessions, but so far April and May sessions remain scheduled. And, as long as the court is open for business, filing deadlines remain in force.

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Many of the tax administration and procedure problems we saw during the 2019 shutdown (discussed in many posts here) could be relevant again very soon. Last summer Keith reviewed the law on Tax Court filing deadlines looking back at the shutdown, linking to several excellent posts by Bryan Camp and others. We have also covered cases pushing (generally unsuccessfully) to expand equitable tolling in tax cases, in myriad situations.

Since the Tax Court process already takes a long time, and the cumulative effects of cancelling trial sessions are substantial, it would make sense for the Court to follow the lead of universities and law firms and conduct as much business remotely as possible during the COVID-19 epidemic.

The Tax Court is in a difficult situation, because the vast majority of its hearings and trials are held in person. Unlike some other courts, the Tax Court does not routinely hear testimony by telephone or other means. However, the Tax Court could expand this practice under Rule 143:

(b) Testimony: The testimony of a witness generally must be taken in open court except as otherwise provided by the Court or these Rules. For good cause in compelling circumstances and with appropriate safeguards, the Court may permit testimony in open court by contemporaneous transmission from a different location.

This rule seems perfectly reasonable, but it is quite broad and open to very different interpretations. Is the standard to be applied individually, based on one’s fear of the coronavirus or vulnerability to it? Or, can the court take a public health approach and determine that flattening the curve is good cause and a compelling reason to permit remote testimony no matter how young or healthy the litigant? Surely the court could take that position.

The next question is what appropriate safeguards should exist. Several years ago I was on a rules committee of the Vermont Supreme Court while the committee debated, drafted, and ultimately recommended a rule for telephone testimony in family court, which the Supreme Court adopted. (I looked up the date and was surprised to see that the rule was adopted in 2009 – time flies.) We were concerned about verifying the identity of the witness and about getting clear testimony from the witness for the record. There was no technology for video appearance so it was all done by speaker phone, on sometimes very patchy connections. (Vermont has notoriously spotty cell phone service, even on interstate freeways.) Despite some frustrating situations involving poor phone service, the rule worked fairly well and it allowed time-sensitive matters to go forward when witnesses had trouble getting to court. Last year the Vermont Supreme Court adopted a uniform rule on remote appearances in civil actions, including family court. Vermont’s procedures and standards are quite detailed and provide significant guidance to attorneys, litigants, and judges.

Several other courts allow remote appearances under various conditions. The Self-Represented Litigation Network issued a report on remote appearances in 2017, which

presents the author’s conclusions about the current state of remote appearances in the United States based on his review of existing state statutes and federal, state and local court rules on the topic and discussions with knowledgeable persons throughout the country. The report has two appendices – a compendium of all the statutes and rules …, and a technology assessment …

The Federal Judicial Center likewise issued a 2017 report on Remote Participation in Bankruptcy Proceedings. Perhaps the issue will gather additional interest and we will see updated reports on remote access to justice.

How the Death of a President Impacts Tax Court Jurisdiction

The ever alert commenter-in-chief and occasional guest blogger, Bob Kamman, brought to my attention a Tax Court order issued on February 21, 2019, as a result of the death of President George H. W. Bush in 2018.  It seems that the petitioner in the case, Ms. Makowski, went to the post office on December 5, 2018, the 90th day to mail her petition to the Tax Court.  When she arrived at the post office, it was closed because President Trump had ordered December 5, 2018 to be a day of national mourning for President Bush.  So, Ms. Makowski had to come back to the post office the next day to mail her petition.  When her petition arrived at the Tax Court, the IRS noticed that it was mailed one day late and filed a motion to dismiss for lack of jurisdiction.

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Ms. Makowski responded to the motion by sending the court a letter explaining the problem she had in trying to mail the letter on the 90th day.  The court then issued the following order:

On February 21, 2019, respondent filed in the above-docketed case a Motion To Dismiss for Lack of Jurisdiction, on the ground that the petition herein was not filed within the time prescribed by section 6213(a) or 7502 of the Internal Revenue Code. Respondent attached to the motion copies of a notice of deficiency and corresponding certified mail list, as evidence of the fact that such notice for the taxable years 2015 and 2016 was sent to petitioner by certified mail on September 6, 2018. On March 26, 2019, the Court received from petitioner a document, initially filed as a letter, that is in the nature of an objection to the motion to dismiss. Therein, petitioner explained, and attached documentation supporting, that she had been unable to mail the petition on the December 5, 2018, due date because of the closure of post offices concomitant with the declaration by President Donald Trump of a National Day of Mourning in honor of former President George H.W. Bush. 

Upon due consideration, it is ORDERED that petitioner’s submission filed March 26, 2018, [sic] as a letter shall be recharacterized as an objection to the pending motion to dismiss. 

It is further ORDERED that, on or before April 18, 2019, respondent shall file a response to petitioner’s just-referenced objection, addressing the impact of the National Day of Mourning declaration for purposes of filing deadlines. 

The IRS withdrew its motion because of the Tax Court’s decision in Guralnik.  The case moved forward to decision where the IRS conceded that she had no deficiency for the two years at issue.  Happy ending.

The case demonstrates another way that the shutdown of the overall federal government (think budget impasse as discussed here) or the Tax Court (think snow as discussed here) can impact a taxpayer’s ability to obtain Tax Court jurisdiction or at least to have a petition deemed timely filed, so that the petitioner need not get into the arguments about whether timely filing creates a jurisdictional issue.

It’s a fairly simple lesson at this point, but the issue of government shutdown resulting from the death of a President reminded me of a problem caused by the death of President Nixon in April of 1994.  This remembrance has absolutely nothing to do with tax procedure so stop reading if you are looking for any meaning here.

At the time of President Nixon’s death, I was the District Counsel for the IRS in Richmond, Virginia which meant I was in charge of the group of attorneys representing the IRS in Virginia.  One of the attorneys in the office was going to a training program in Boulder, Colorado.  As I remember, the program ran from Tuesday morning through Thursday afternoon with Monday and Friday as travel days.  The attorney liked to ski and decided to go to Colorado early in order to get in some skiing over the weekend.  The flight cost to the government was the same, and he picked up his expenses for the time before the training program began. 

After he left Richmond and before the training program began, the government announced that Wednesday of the week of the training program would be a day of national mourning for President Nixon.  That caused the office to cancel the training program since it could not be held on Wednesday and that created a big hole in the programming.  By the time of the decision, the attorney was already on the slopes.  This was an era before cell phones and other forms of instant communication, so I called the ski resort and asked it to leave a message on its message board for the attorney to call me.  That failed.  I called the hotel in Boulder where he was going to stay and did connect with him once he arrived there.  He returned to Richmond after receiving the message at the hotel, and we began the process of putting in a travel voucher for a trip to a training program that was cancelled.

Many memos and phone calls later, the government did cover the cost of his airfare and one night’s lodging, but the exercise forever burned in my memory the fact that the government shuts down when a President dies, even though the consequences of the shutdown can be unexpected.  As bad as it seemed when I was writing and calling on behalf of the employee to obtain his reimbursement, I remember that my counterpart in Chicago had an employee who had a fear of flying and took the train from Chicago to Colorado to attend the training.  So, I was not the only one with this headache. 

Shutting down the government creates many ripples.  If you have a Tax Court matter with a due date on the shutdown, keep Guralnik in mind.  This is yet another situation where it can come in handy.

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.

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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 8.23.4.3(2).) 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, 8.22.7.10.6) 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.

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“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…

Disbarment of Attorney by Tax Court Reversed by D.C. Circuit

In Koresko v. U.S. Tax Court, No. 18-1146 (D.C. Cir. 2019) the court reversed the disbarment of Mr. Koresko from the Tax Court and remanded the case so that the Tax Court could give him the opportunity for a hearing before being disbarred, otherwise disciplined or exonerated.  I read the short order from the circuit court remanding this case and became curious why the Tax Court would decline to give him a hearing before taking him off the record of approved attorneys.  So, I had my research assistant pull the underlying documents including the briefs. 

I will link to the documents so that anyone interested in the matter can easily access them.  After quickly reviewing them, I understand what happened at the Tax Court.  I found that the Tax Court was incredibly understanding and postponed the matter over a period of years.  The new opportunity for a hearing is unlikely to change the outcome here, but the case gives a glimpse at the process for those interested.  I wrote about a Tax Court disciplinary proceeding a couple of years ago regarding Aka v. United States Tax Court, 854 F.3d 30, 32 (D.C. Cir. 2017).  Bob Kamman wrote about an order setting a hearing for a disciplinary proceeding. 

Both the Aka case and the case Bob covered involved failures of petitioner’s counsel in proceedings before the Tax Court.  The Koresko case involves the reciprocal disciplinary issue present in the Tax Court when another court or bar disciplines a practitioner. Mr. Koresko did nothing in his practice before the Tax Court to cause the Tax Court to initiate disciplinary proceedings against him the way it did against Mr. Aka. But Tax Court Rule 202 requires that a practitioner notify the Tax Court of any disciplinary action by another court or bar and can base its own disciplinary action on the action of the other venue.  The issue here stems from multiple problems between Mr. Koresko and Pennsylvania, their timing and the timing of his failures to respond to the Tax Court’s offers of a hearing.

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Here is the Tax Court’s announcement of the disbarment of Mr. Koresko and its explanation of the reason for the disbarment.  Here is the Department of Justice brief to the D.C. Circuit which provides the best road map for understanding the case.  Here is Mr. Koresko’s brief to the D.C. Circuit.  Here is the order of the Pennsylvania Supreme Court and the Report and Recommendations of the Disciplinary Board of the Supreme Court of Pennsylvania.  There is more here to read than most will want.  I will summarize the issues, drawing heavily from the DOJ brief.

Mr. Koresko’s initial problem with the PA bar (as far as these proceedings go) concerns actions with respect to an ERISA plan.  Then he gets in trouble relating to the sale of a home owned by he and his wife to the tenant.  When he sold the property he did the legal work for the title policy.  The property had two liens against it.  One lien was satisfied with the proceeds of the sale.  The other lien resulted from a suit against Mr. Koresko.  He contested the validity of this judgment lien; however, he failed to mention it in the title report or to the buyer.  The existence of this lien came to light when the holder of the lien sued Mr. Koresko and the buyer.  Things went downhill from there with a number of his problems with the PA bar stemming from actions in the ensuing litigation.  As with the Tax Court disbarment proceedings, the matter before the PA bar took quite some time.  If nothing else, Mr. Koresko has definite skills in prolonging proceedings.

Here is a description from the DOJ brief:

The action that gave rise to this appeal arose from orders to show cause issued by the Tax Court due to (1) the Pennsylvania Supreme Court’s December 19, 2013 emergency suspension of Koresko’s license to practice of law, premised on misconduct connected to his fiduciary duties under the Employee Retirement Income Security Act of 1974, 28 U.S.C. §§ 1001, et seq., (“ERISA”) with regard to certain employee welfare benefit plans and (2) the Pennsylvania Supreme Court’s September 14, 2015 disbarment of Koresko, premised on “multiple litigation actions by Mr. Koresko from 2008 through 2013 related to the sale of a home by Mr. Koresko and his ex-wife to a tenant.” (A205-06.) It was also based on Koresko’s failure to inform the Tax Court of these and other disciplinary actions. (A205.) It is the Tax Court’s understanding that (in addition to Pennsylvania Supreme Court), the Florida Supreme Court, the United States Supreme Court, and the Eastern District of Pennsylvania have also disbarred Koresko, and that the Third Circuit has indefinitely suspended him. (See In re Koresko, 136 S. Ct. 2535 (2016) (Mem.); Florida Bar v. Koresko, 2016 WL 4143279 (Fla. 2016); A186.)

The DOJ brief also addressed the efforts of the Tax Court to deal with his case:

the Tax Court issued four orders to show cause, outlining precisely the bases for reciprocal discipline and for finding Koresko had violated Tax Court Rule 202(b) and Model Rule 3.4(a) by failing to alert the Tax Court to disciplinary actions taken by other courts. (A7-8; A97-99; A141-46; A184-87.) These orders provided ample notice of the bases for discipline.

The brief detailed the notice provided and the action taken:

the Tax Court offered the following potential hearing dates, with clear notice deadlines:

Order dateOffered hearing dateRequired notice dateCitation
3/19/20147/16/20144/22/2014A7
4/26/20147/16/20146/24/2014A14
6/27/201410/9/20148/15/2014A96
10/6/201412/16/201411/25/2014A99
5/16/20166/28/20166/10/2016A145

The D.C. Circuit’s problem is that although Mr. Koresko did not respond timely to the timeframes set by the Tax Court, the Tax Court focused on his failure to request a hearing in early orders that were based on his suspension from the PA bar and not on the orders issued later after the PA bar disbarred him.  So, his case will go back to the Tax Court which will offer him another opportunity for a hearing.  Assuming that he timely accepts the new hearing, Mr. Koresko then faces the uphill battle to convince the Tax Court that it should not disbar him or take other disciplinary action.  I would not expect the matter to move quickly based on what I have seen so far. 

I am not sure the case offers many lessons, but it does provide insight into the disciplinary efforts of the Tax Court in a reciprocal discipline matter and serve as a reminder that if any readers have friends or acquaintances who encounter disciplinary problems at the local level, they need to advise their friends and acquaintances to notify the Tax Court.  Because the Tax Court is not the only bar with reciprocal discipline, it should also be noted that if you have a problem like Mr. Aka’s that originates in the Tax Court, that problem can impact a practitioner’s ability to practice in other bars to which the practitioner may be a member.  The main lesson from reading bar discipline cases is to avoid doing the things that bring these actions down upon you.  Only a small minority of practitioners go through this process at the Tax Court.  Make sure you are not a member of that minority.

The Tax Court Has Updated Its Procedures for Non-Attorney Admission

I wrote a blog post a few years ago on non-attorney admission to the Tax Court that has become one of the most popular blog posts written on our site.  Because of the interest in the subject, I wanted to provide this short update because the Tax Court has recently updated its procedures.  You can find the updated procedures here.  The Tax Court admits non-attorneys for historical reasons.  You can read about the history behind this in the Court’s authorized and terrific biography, which was updated a few years ago by Dean Brant Hellwig of Washington and Lee Law School.  There are some non-attorney Tax Court practitioners in the Boston area I know who use it as an adjunct to their practice as enrolled agents.  If you are interested in taking the test, I suggest reading about the updated provisions.