Odds and Ends: Designated Orders 10/26/20 to 10/30/20

As the United States Tax Court made their conversion from their prior court filing system to the DAWSON system, we are no longer going to have designated orders selected by the Tax Court. Instead, we can browse the orders of the day and select which orders are worthy of interest. Perhaps the longest orders are the best ones, but I have found that short orders might be ones of interest also.

While Samantha Galvin had substantive orders in the last week of designated orders, my last week of designated orders was earlier and I felt more like they were odds and ends being cleaned out. There were 7 designated orders in the week that I will give brief descriptions for as they were generally 2-4 pages in length and varied in category.

Dismissal for Lack of Jurisdiction

  • Docket No. 5103-19, Joseph C. Ho v. C.I.R., Order of Dismissal for Lack of Jurisdiction 10/28/20 available here.

One of the strict rules for the Tax Court is the deadline for filing a petition within the prescribed time period. For a notice of deficiency, the time period is a 90-day period that is generally provided on the notice mailed out by the IRS.

Mr. Ho was able to meet the deadline for filing his petition. The problem is that he mailed it to the wrong place. He mailed his petition by certified mail to the IRS in Holtsville, New York, where it arrived on his deadline of February 11, 2019. It was forwarded by the IRS on March 8 and the Tax Court received it on March 14 (both dates after the 90-day period expired). The result is that the Court granted the IRS’s motion to dismiss for lack of jurisdiction.

All is not lost for Mr. Ho, however. The motion from the IRS states: “Although the petition was not timely filed in this case, Respondent’s counsel has been working with Petitioner to attempt to administratively resolve this case…Petitioner informed Respondent’s counsel that he has no objection to the granting of this motion.”

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Motion to Dismiss for Lack of Prosecution 1

  • Docket No. 13644-19, Timothy Stevens, Jr., v. C.I.R., Order of Dismissal and Decision 10/28/20 available here.

If you spend time working Tax Court cases, you become familiar with motions to dismiss for lack of prosecution. In person or in a court order, there is an inevitable discussion between the Tax Court judge and IRS Counsel about the lack of responsiveness from the petitioner. Usually, the petitioner files the petition and does nothing else. The IRS Counsel will usually relate about attempts to contact the petitioner like telephone calls and mail that got no response. That is the case here, but I want to commend Judge Gale for the thorough order in this case. The order goes through the case law involved supporting the order of dismissal. If you want to read through textbook analysis of the law supporting a Tax Court judge’s order of dismissal in a case, I would recommend that you look at this order.

Motion to Dismiss for Lack of Prosecution 2

  • Docket No. 2322-19, Jaideep S. Chawla v. C.I.R., Order of Dismissal and Decision available 10/27/20 here.

Once again, we have a routine order of dismissal based on the motion to dismiss for lack of prosecution. In this instance, I wanted to note petitioner’s letter where petitioner stated that “petitioner’s name is now John Adams; multiple lawsuits have been filed by petitioner against the Internal Revenue Service related to the alleged tax bill; and the petitioner will not pay any debt until the Internal Revenue Service releases all federal tax filings of President Barack Obama to petitioner.” Following that letter, the petitioner did not appear for the remote hearing on the case. Understandably, the respondent’s motion to dismiss for lack of prosecution was granted by the Court.

Incompetent Person Needing Next Friend

  • Docket No. 3136-20S, Laura B. Walker v. C.I.R., Order 10/30/20 available here.

The IRS filed a motion to change or correct the caption in this case to name the petitioner’s daughter, Kimberly Walker Fuller, as her next friend. They represent that Laura Walker is currently incapacitated and unable to manage her own financial affairs, plus she previously appointed Ms. Fuller as her agent to handle such matters. Ms. Fuller has no objection to the granting of the motion.

Tax Court Rule 60(a)(1) requires a case seeking redetermination of a deficiency be brought by and in the name of the person that the deficiency was determined against, or by the fiduciary entitled to institute a case on behalf of such a person. Rule 60(d) provides that a representative, such as a guardian, conservator, or like fiduciary, may bring a Tax Court case on behalf of the incompetent person. An incompetent person without a duly appointed legal representative may act by a next friend.

Ms. Fuller has a power of attorney that allows her to act as Ms. Walker’s agent for purposes that include pursuing claims and litigation and pursuing tax matters. The power of attorney is not affected by Ms. Walker’s subsequent disability or incapacity, and is governed by Pennsylvania law.

The Court reviewed Pennsylvania law and the power of attorney form. Finding that the power of attorney form is sufficient, the Court recognized Ms. Fuller to commence and prosecute the case on Ms. Walker’s behalf and recognized her as next friend pursuant to Rule 60(d). The caption was also ordered to be changed.

Whistleblower Denial

  • Docket No. 10452-19W, Bobbi J. Marvel v. C.I.R., Order and Decision (order here).

The Tax Court has jurisdiction under I.R.C. section 7623(b)(4) to review decisions of the Whistleblower Office to reject a claim for failing to meet the threshold requirements applicable to whistleblower claims. In short, a whistleblower needs to prove that there was administrative or judicial action to collect unpaid tax or otherwise enforce the internal revenue laws based on the information provided by the whistleblower.

Here, the whistleblower submitted that the target taxpayer had not filed tax returns for tax years 2013 through 2018. The issue is that the IRS did not pursue any action because the unfiled tax returns fell below the threshold for an audit. Since the IRS did not audit the target taxpayer, they did not take any action based on the whistleblower’s information. In the Tax Court’s review, there was thus no abuse of discretion by the IRS examiner and the Court sustained the final determination denying the whistleblower claim.

CDP – No Hearing in Person

  • Docket No. 14307-18 L, Scott Allan Webber v. C.I.R., Order available 10/30/20 here.

This case has been documented at previous times in Procedurally Taxing because of some groundbreaking issues related to collection due process (here and here).

This time, there is discussion of the Court granting an IRS motion to modify the remand instructions for remanding the case to be reviewed by IRS Appeals. The hearing on the motion to modify the remand instructions was going to be conducted by video conference or telephone unless the parties agreed to meet in person. Mr. Webber filed a motion to reconsider the Court order because he wanted the hearing to be in person. Mr. Webber has 6-8 bankers boxes of records that contain potential relevance to the case.

The Court repeats that it is not going to adjudicate Mr. Webber’s entitlement to an overpayment regarding the credit elect in controversy and that the issue on remand is whether the IRS allowed the overpayment but failed to credit it. That is a question of what the IRS did, not what Mr. Webber did. Those records would likely be in IRS records about Mr. Webber’s case and not Mr. Webber’s records about his transactions. Since Mr. Webber did not explain the relevance of his boxes of documents, the Court denied his motion for reconsideration.

Results for Motion to Compel

  • Docket No. 25934-17, Dean Kalivas v. C.I.R., Order available 10/26/20 here.

In this case, IRS Counsel filed a motion to compel production of documents with regard to 4 requests. Mr. Kalivas did not file a response to the court, but sent it to IRS Counsel. In their status report, the IRS summarized Mr. Kalivas’s response that he had no documents for requests 1, 2, and 4. Also, he provided documents for request 3 during informal discovery and had no further documents to provide. IRS Counsel stated in their status report that requests 3 and 4 were now moot.

Request 1 concerned whether payments made by Richard McKinney to Mr. Kalivas were taxable income or repayments of a loan. Request 2 concerned Mr. Kalivas’s entitlement to Schedule C and E expense deductions.

The Tax Court granted the motion to compel in part so that Mr. Kalivas is precluded from producing at trial documents responsive to those 2 requests that he failed to produce prior to the order. The motion to compel was denied in part, with prejudice, in that they do not take as established the taxability of Mr. McKinney’s payments or how Mr. Kalivas would not be entitled to the Schedule C and E expense deductions.

Not groundbreaking cases this week, but I think there have been some pearls of wisdom to find in my last post on designated orders. Overall, writing about designated orders has been a great experience as it stretched my writing abilities. In addition, I have learned about the Tax Court and areas of tax law outside of the Low Income Taxpayer Clinic realm (whistleblower cases, for example). I am grateful for this opportunity with Procedurally Taxing and look forward to writing on the next tax topics.

Incapacitation, Death and the End of an Era, Designated Orders November 16 – 21, 2020, Part II

The week of November 16, 2020 was the week preceding Thanksgiving and the Tax Court’s transition to Dawson was looming, which meant orders would no longer be “designated” on a daily basis. The judges knew it may be one of their last opportunities to alert the public (and Procedurally Taxing) to an order. Many lengthy, novel and diverse orders were designated. As a result, my week in November warranted two parts, and this second part is my last post on designated orders ever. I’ve learned a lot over the last three and a half years, and I hope you all have too.

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Answering Interrogatories while Incapacitated

In consolidated Docket No. 26812-12, 29644-12, 26052-13, 27243-15, 5314-16, 5315-16, 5136-16, 5318-16, Deerco, Inc., et al. v. CIR, the case involves the acquisition of a corporation and the subsequent removal of substantial plan assets (over $24 million) from the acquired corporation’s pension plan in 2008.

The petitioner who is the focus of this order was the President of the acquiring corporation and the trustee for the pension plan of the acquired corporation in control of the disposition of assets, so naturally, the IRS is very interested in what he has to say. Unfortunately, he is incapacitated. His counsel answered some of the IRS’s interrogatories on behalf of all the petitioners (individuals and entities) in this consolidated case by stating that they lack information or knowledge.

The IRS and Court find petitioners’ counsel’s answers to be insufficient for a couple reasons:

1) Rule 71(b) requires the answering party to make reasonable inquiry and ascertain readily available information. A party cannot simply state they lack the information without explaining the efforts they have made to obtain the information. Even though the petitioner is incapable of responding, the Court thinks he should have documents or records that would enable his counsel to answer the substance of the interrogatories. Petitioner also had an attorney and accountant assisting him during the transaction at issue, and those individuals may have useful information, documents, or records.

2) The Court also finds the answers are procedurally defective. The procedures, found in Rule 71(c), differ depending on whether an individual or an entity is providing the answer. In this case, petitioners’ counsel has signed under oath the answers on behalf of all petitioners. Counsel is permitted to answer and sign under oath for entities, but not for individuals. Individuals must sign and swear under oath themselves. The petitioner in this case can’t do that, but his wife has been appointed as his guardian, so she can.

There are other issues raised (such attorney-client privilege concerns), but the prevailing message is that the Court thinks petitioner’s counsel can do better and outlines the ways in which they can provide more adequate answers.

We Cannot See A Transferee

In consolidated Docket No. 19035-13, 19036-13, 19037-13, 19038-13, 19058-13, 19171-13, 19232-13, 19237-13,  Liao, Transferees, et al. v. CIR, the IRS tries several avenues to prove that petitioners, who consist of the estate and heirs of a taxpayer who owned a holding company, called Carnes Oil, should be liable as transferees when an acquisition company ultimately sold the company’s assets and tried to use a tax shelter to offset the capital gains.

In this case, initially, a company called MidCoast offered to buy Carnes Oil’s shares. MidCoast has a history of facilitating a tax shelter known as an “intermediary transaction.” In another post for PT (here), Marilyn Ames covers a Sixth Circuit decision in Hawk, which involved MidCoast, intermediary transactions, and some implications under section 6901. In Hawk, the Court affirmed the Tax Court’s decision and held that petitioners’ lack of intent or knowledge cannot shield them from transferee liability when the substance of the transaction supports such a finding.

In this case, petitioners have moved for summary judgment, and their lack of knowledge is one of the factors the Court uses to ultimately determine petitioners should not be held liable as transferees. Petitioners’ case is distinguishable from Hawk, because the Court determines, in substance, the transaction was a real sale.  

Petitioners didn’t accept MidCoast’s offer, but instead accepted an offer from another company called ASI. More details are fleshed out below, but long story short- the IRS argues an “intermediary transaction” occurred. In support of this the IRS insists that the economic substance doctrine (a question of law) and substance over form analysis (a question of fact) show that what looked like a sale of stock for money was really the sale of Carnes Oil’s assets followed by a liquidating distribution directly from the company to petitioners. The IRS seeks to reclassify the estate and heirs from sellers to transferees to hold them liable.

Even viewing the facts in a light most favorable to the IRS, the Court disagrees under both analyses. The heirs reside in different states, so the appellate jurisdiction varies. The Court acknowledges that they may have to contend with subtle conflicts among the jurisdictions, but regardless of the jurisdiction, whether a transaction has economic substance requires a close examination of the facts.

The facts show that when petitioners sold their stock the company still had non-cash assets, and those assets weren’t liquidated until after ASI controlled it. Petitioners also weren’t shareholders of the dissolved corporation, because it continued to exist for over a year after they sold it.

The facts are not clear as to where ASI got the money to pay petitioners, but after tracing the funds from relevant bank accounts, the Court determined it did not come from Carnes Oil, or a loan secured by their shares.

Neither the petitioners nor their advisers had actual knowledge of what ASI was planning to do. The IRS says there were red flags and petitioners should have known, but the Court finds Carnes Oil was a family company using local lawyers in a small town, and the shareholders reasonably accepted the highest bid.

It was a real sale. The company got an asset-rich corporation and petitioners got cash. The Court grants petitioners’ motion for summary judgment – a win for petitioners in an increasingly pro-IRS realm.

Gone and Abandoned

In Docket No. 23676-18, Miller v. CIR, the Court dismisses a deceased petitioner’s case for lack of prosecution despite his wife being appointed as his personal representative. Petitioner died less than a month after petitioning the Tax Court in 2018 and after some digging the IRS found information about petitioner’s wife.

The Court reached out to her and warned that if she failed to respond the case was at risk of being dismissed with a decision entered in respondent’s favor. The Court did not receive a response.

Rule 63(a) governs when a petitioner dies and allows the Court to order a substitution of the proper parties. Local law determines who can be a substitute. The Court’s jurisdiction continues when someone is deceased, but someone must be lawfully authorized to act on behalf of the estate. If no one steps up the prosecution of the case is deemed to be abandoned.

The Court finds petitioner is liable for the deficiency amount, but it’s not a total loss for the estate, because IRS can’t prove they complied with section 6751(b) so the proposed accuracy-related penalty is not sustained.

All’s Fair in Love and SNOD

In consolidated Docket No. 7671-17 and 10878-16, Roman et. al. v. CIR, a pro se married couple with separate, but consolidated Tax Court matters moves the Court to reconsider its decision to deny petitioners’ earlier motions to dismiss for lack of jurisdiction. The motions were disposed of by bench opinion.

The Court reviews the record and determines that petitioner made objections that have yet to be ruled on.

First, however, it explains that there are two procedural reasons for why petitioner motions could be denied. Petitioners filed the present motion under Rule 183, but that rule only applies to cases tried before a Special Trial Judge. Petitioners in this case have not yet had a trial, the bench opinion only exists to dispose of petitioners’ motions to dismiss, so Rule 183 is not applicable. Additionally, the motions for reconsideration were filed more than 30 days after the petitioners received the transcripts in their case, so they were not timely under rule 161.

Even though the motions could be denied for those reasons, the Court goes on to consider the merits of petitioners’ arguments.

Petitioners’ argue that the Court lacks jurisdiction because their notices of deficiency were invalid because they were not issued under Secretary’s authority as required by section 6212(a).   

Petitioner wife argues her notice of deficiency is invalid because it originated from an Automated Underreported (AUR) department and was issued by a computer system, which is not a under a permissible delegation of the Secretary’s authority.  

Petitioner husband’s notice of deficiency was issued by a Revenue Agent Reviewers about a year later. He argues that his notice is invalid because the person who signed the notice was not named on the notice and she did not have delegated authority to issue the notice. The IRS was not sure who issued the notice, but there were three possibilities. Petitioner husband says not knowing who specifically issued the notice constitutes fraud.

After reviewing the code, regulations, extensive case law, and the Internal Revenue Manual the Court concludes both notices were issued under permissible delegations of the Secretary’s authority and the case can proceed to trial.

Orders not discussed:

  • In Docket No. 25660-17, Belmont Interests, Inc. v. CIR, the Court needs more information from the IRS about how it plans to use the exhibits which petitioner wants deemed inadmissible. According to IRS, the exhibits support the duty of consistency related to representations made by petitioner. Petitioner states the exhibits include representations made in negotiations directed toward the resolution of prior cases involving the same or very similar issues and the F.R.E. 408(a) bars their admission.  
  • Docket No. 10204-19, Spagnoletti v. CIR (order here) petitioner moves to vacate or revise the decision in his CDP case based on arguments made in the original opinion which the Court found were not raised during in the CDP hearing nor supported by the record, so the Court denies the motion.
  • Docket No. 11183-19, Bright v. CIR and Docket No. 18783-19, Williams v. CIR, two bench opinions in which petitioners were denied work-related deductions primarily due to lack of proper proof.  

When the “Routine” Morphs into a “Ticket to Tax Court”

We welcome guest blogger Steve Jager.  Steve is a regular reader of PT with a commercial and a pro bono tax practice.  He devotes a lot of time to the LITC at California State University Northridge [known as the Bookstein LITC], serving as one of their “Tax Court Advisors”  and regularly working with clinic staff/students and clients in resolving issues. He is also a partner in private practice with the firm of Fineman West & Company, LLP.  Although licensed as a CPA, he has passed the test to practice before the Tax Court which a small percentage of practitioners pass each time the Court offers the test.

Steve brings us the story of one of his clients driven to Tax Court by the pandemic and the inability of the IRS to process its mail.  Steve’s case probably represents one of many in this situation where taxpayers receive a notice of deficiency (or notice of determination) not through any fault of their own or of the IRS but because the significant delays in processing mail cause the IRS system to move the case into the deficiency procedure process rather than allowing resolution at the administrative stage.  This by-product of the pandemic certainly occurred in pre-pandemic times but not to the extent of the current level of cases caused by the failure to match correspondence which could resolve the case with the taxpayer’s file.  This causes extra work for the practitioner which is not compensated in the current attorney fee structure, extra anxiety for the taxpayer (and costs) and extra work for Chief Counsel attorneys forced to work on cases that would have been resolved at a lower level.  Taking the case to Tax Court does buy a taxpayer the personal service of an attorney or paralegal rather than the impenetrable correspondence unit of a Service Center but at a high price for all.  Hopefully, the cost here will obtain for Steve’s client the desired result.  Because the client paid the tax prior to the mailing of the notice of deficiency, I expect the IRS will file a motion to dismiss.  Keith

I feared it could happen, but prayed it would not.  I knew the cogs in the IRS machinery were still churning out Notices, and I also knew that the IRS was not keeping up with all the correspondence it was creating with these Notices and I wondered what would happen IF an IRS failure to quickly process a reply to Notice CP2000 occurred…   And then it did. 

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Most of us are probably already familiar with the CP2000 Notice – that Notice that the IRS uses when a “routine matching” of the W2’s and 1099’s are matched up against the tax returns that are filed, and when there is a “mismatch,” the letter that is sent out to the Taxpayer is the CP2000, which assumes that the “mismatch” is unreported income (or an incorrectly deducted interest expense amount), and the IRS gives the taxpayer the opportunity to either pay the calculated tax or otherwise offer explanations as to why the “mismatches” are already reported or not taxable or correctly deducted, as the case may be.  So the possible responses from the Taxpayer (or his/her practitioner) would be either: (i) concession of the amount requested, with or without payment of the additional tax; or (ii) partial concession with a full explanation as to why the concession was only partial – i.e., agreeing with one or more, but not all of the adjustments proposed by the IRS; or (iii) no concession due to a full explanation as to why the proposed adjustments are not correct.    Under “normal” conditions [read that as prior to the pandemic], any of those responses made within 30 days would be considered and at least acknowledged by the IRS.  This, of course, would mean that someone at the Service Center has opened the mail, read the response and within those 30 days, has generated a reply letter back to the Taxpayer.  

But what happens now when the IRS is behind in opening mail, reading the correspondence and writing replies?

Well, it would appear that under the current conditions the CP2000 “machinery” is assuming there has been no response and “pulling the trigger” by issuing the Statutory Notice of Deficiency!  Yikes!  Once the IRS has issued a Statutory Notice of Deficiency, it is really hard to convince the IRS to rescind the Notice (made especially hard, once again, by the fact that the IRS is not running at full capacity), so the Taxpayer has little choice except to file a petition with the United States Tax Court.  Let me relate my own clients’ story.  

Let’s call these clients, Mr. and Mrs. Taxpayer.  When I prepared their 2018 income tax return, I was unaware that Mr. Taxpayer had begun receiving social security income during that tax year, and he did not give me the 1099 from the Social Security Administration, and I certainly did not know to ask him for it.  Therefore, that income was omitted from the tax return.  The IRS computer, however, when matching the social security administration payments against the tax returns, realized a “mismatch,” and a CP2000 was issued last October.  My client received the Notice and contacted me, whereupon we quickly figured out that the income should have been reported, but was not, so I instructed my client to write a check for the tax and the interest as calculated by the IRS.  My client wrote that check IMMEDIATELY, and mailed it with the correct payment stub to the address, as instructed by the IRS.    The IRS cashed the check within 7 days of its receipt, so we know they are still opening the mail quickly, but then things obviously break down.  Notwithstanding the fact that I have had to elevate this to the Tax Court (more on that in a moment), the truly insidious part of this now all-too-common saga, is that the IRS had apparently not credited the payment to the account for Mr. and Mrs. Taxpayer, which resulted in the Statutory Notice being issued!  Once the check was noted as received, I must ask why the IRS machinery wasn’t stopped?

Regardless of why this has happened despite Mr. and Mrs. Taxpayer’s compliance, the reality is that I have had to file a Petition in the Tax Court.  This was certainly not my first petition filed with the Court, but it is my first which was filed electronically, pursuant to the new DAWSON system which the Tax Court has been so excited to roll out.  Preparing the petition was exactly the same as before – that is to say that the Petitioner or practitioner still drafts the Petition as before, and merely uploads the petition as a pdf file, which is a fairly simple process.  Paying the $60 filing fee, which in the past would have been paid by writing a check out of my Client Trust Account, was fairly easy to do by establishing an account with Pay.gov.

Now that the Petition is filed and the IRS is “served,” relatively expensive IRS resources are going to be needed.  Since I have asked for the Trial to be conducted in Los Angeles, I believe that at least a paralegal will need to be conscripted into drafting the Answer to the Petition.   Once that has happened and the Commissioner and my clients are “at issue,” only then will I be able to offer the copy of Mr. and Mrs. Taxpayer’s canceled check to prove that they timely paid the tax that they conceded as soon as they were notified, plus interest.

In this case, my clients, Mr. and Mrs. Taxpayer, are fortunate.  They are being represented and I expect to resolve this case easily.   But how many other folks are there who are compliant, law-abiding taxpaying citizens who will also need to go through a similar ordeal on their own…  unless, of course, they find their way (and are eligible for services) by one of the many LITC clinics.  And for those who do not qualify for LITC Service?   How much will those folks need to pay a professional lawyer or qualified Tax Court practitioner if they wish to be represented?

DAWSON Updates

As we discussed here, the Tax Court rolled out its new case management system on December 28, 2020.  The rollout is the beginning of a process and not the end.  Today, the Court announced the first of what will probably be several announcements as new features come online.  This announcement provides information about the release of orders to the public.  Tax Court orders have long been a under observed aspect of the decision making of the Court.  Starting almost 10 years ago, the Court made these orders public and searchable.  The search feature is important for those wanting to track a specific issue or follow orders of a specific judge.  While orders do not create precedent, we found them sufficiently important to start the designated order feature here a few years back.  We look forward to the ability to track orders going forward in the same easy to search and free to all aspect of the Court’s online presence that greatly outperforms PACER.

DAWSON is Awesome

We welcome back guest blogger Steve Milgrom.  Steve is the litigation coordinator at the low income taxpayer clinic located at the Legal Aid Society of San Diego.  He provides a thoughtful voice on tax procedure issues facing low income taxpayers.  Today, he provides an initial and very positive reaction to the Tax Court’s new electronic case filing system, DAWSON.  We have written about DAWSON before here, here and here.

Because I was waiting for DAWSON to go live in order to file some documents, I experienced it on the first day it opened.  I found it to be easy to use.  I echo Steve’s remarks about the positive feature of filing petitions electronically.  While the high number of pro se taxpayers coming to the Tax Court almost certainly means it will continue to receive paper petitions for some time, the prospect of filing a petition electronically and knowing it is timely filed provides a wonderful improvement over the myriad of situations in which something can go wrong when filing a paper return.  This is not to say that nothing can go wrong when filing electronically as we have seen with the electronic filing of returns but the ability to manage the problem seems much greater.  Keith

DAWSON!  As a tax lawyer who already talks in Code, I’ve added a new word to my lexicon.  DAWSON!  What a fabulous word it is!  And it didn’t even take an act of Congress.

Dawson is the name given to the Tax Court’s new case management system.  If this is the wonkiest thing I’ve ever celebrated I don’t know what is.  Why the celebration?  With the role out of Dawson on December 26th the Tax Court now permits Petitions to be e-filed.  And yes, December 26th was a Sunday.  Someone was actually working the weekend to get it going.

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Those of us who read Tax Court opinions for fun know the havoc that a snowstorm in D.C. can play with Taxpayer Rights.  For some unknown reason many taxpayers, and even some practitioners, want to spend more than the cost of a first class stamp to send their Petitions to the Tax Court.  If one chose the wrong delivery service and the Petition didn’t arrive by the 90th day following the mailing of a Notice of Deficiency, the taxpayer lost their right to engage in a pre-assessment challenge to the IRS’s determination that they owed the government more money.  See Guralnik v. Commissioner, 146 T.C. 230 (2016).  That’s a big loss and a big black eye for any practitioner who missed the filing deadline due to hiring someone other than the U.S. Post Office to deliver a Petition.  But what an inequitable result due to an act of God!  Well, Keith and Carl Smith fought this battle in many different venues with little success.  One wonders if this is what pushed Carl into full retirement?

Wherefore Dawson?  The Tax Court decided to honor the late Judge Howard A. Dawson, Jr., who was first appointed to the Tax Court by President Kennedy in 1962, was reappointed by President Nixon, and went on Senior status in 1985.  According to the Tax Court’s web site he was known as a meticulous record keeper, which is probably what inspired the naming of a case management system in his honor.

I propose a plaque be placed on the Tax Court building in his honor, designating him as the founder of the 21st Century Tax Court.  We all owe Judge Dawson a hurrah for his contribution to the court’s recognition of the importance of e-filing to Taxpayer Rights.  Each step that simplifies our dealings with the government is to be celebrated.  If someone from the Court wants to contact me, I will personally pay for the plaque.

Now if we could just get the Tax Court to give us equal access to court filings.  While Chief Judge Foley recently wrote that the pandemic has revealed that geography is not a barrier to connection, it sure is a barrier to Taxpayer Rights.  Just like other Federal courts, the Tax Court’s records should be available for remote viewing so we can all have the benefit of learning from what others do in their cases.  I never met Judge Dawson but I hope he would support additional access to the Court for the millions of taxpayers and practitioners who don’t live in D.C.

Year in Review – Tax Court Administration

The Tax Court had to close its building in March and cancel the remaining Winter and Spring calendars because of the pandemic. While the judges continued to work, the cases awaiting trial stacked up. The Court also had to confront how it would operate once it began holding trials again. In addition to having to deal with all of the changes required by the pandemic, the Court had also planned to install a new website and system of administration of cases this year adding to the complexities it needed to manage. So, there is much to talk about in reviewing the administration of the Tax Court during 2020.

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Building Closure and Calendar Cancellation

The building closed on March 19, 2020 as a result of the pandemic.  Then, it partially reopened enough to allow outsiders to walk down the hall from the entry point to deliver documents to the clerk’s office, and it closed again. Even though the building was closed for most of the year the judges continued to work and to produce opinions.

In addition to closing the Tax Court building in Washington, the pandemic caused the cancellation of all Tax Court calendars around the county for the remainder of the Winter and Spring trial sessions. When the Tax Court started holding trials again in the fall of 2020, it did so remotely.

The pandemic created an extension of time to file a Tax Court petition. In addition to the extension of the deadline for filing petitions brought on through the Guralnik case by the closure of the clerk’s office and through IRC 7508A though the IRS notice regarding the pandemic it is also possible that an extension of the time to file a petition has occurred through 7508A(d). We will find out the answer in the coming year(s).

Obtaining Documents from the Court

Because the Court building has been closed for most of the year, the ability to access documents filed in Tax Court cases by physically viewing them at the Court has been unavailable. Unlike the federal courts covered by the PACER system, the Tax Court does not make documents filed in its cases electronically available except that it makes electronically available the documents produced by the Tax Court. So, someone interested in seeing a document filed in the Tax Court must physically go to the Tax Court where they can look at one of the two computer terminals in the clerk’s office anteroom which displays all of the documents or request the physical file from one of the clerk’s office employees at the window of that office. Since the public could not access the clerk’s office, this left as the only option for obtaining documents the process of calling the clerk’s office and ordering the documents. For most of 2020 the first two options have been unavailable and from March to May the third one was unavailable as well.

None of these options for obtaining a document exist when the clerk’s office is closed. If the clerk’s office is closed and you wish to see a document filed by a party, you, if you are not a party, simply cannot do it.  While the Tax Court considered itself open and engaged in handling cases during the pandemic, it effectively denied anyone not connected with the Court or a specific case the right to see case documents during the period when its clerk’s office was closed. This creates a frustrating situation for anyone who would like to see case documents and who might be involved in filing briefs or preparing petitions or other documents necessary to move their case forward.

When the clerk’s office reopened after the pandemic created closure, the Court did, however, make it cheaper and quicker to obtain documents when the clerk’s office is open. This is a great first step. I hope the new DAWSON system and reflection on the lack of access to party documents during the clerk’s office closure may create other changes that will open access further. Maggie Goff and I published an article in Tax Notes on May 4, 2020 entitled “Nonparty Remote Electronic Access to Tax Court Records” discussing the legitimate privacy concerns that the Tax Court faces when considering access to the Tax Court records of individuals and suggesting ways to meet those concerns while making documents more available to the public.

In cases involving entities, however, we see no legitimate privacy concerns of general application with respect to the documents filed. Of course, entities can have secrets in need of protection through record sealing. The stated policy reasons for denying electronic access do not apply to cases involving entities. An easy second step to opening up electronic access, at least from a policy perspective though not necessarily an administrative one, would be to remove restrictions in the cases involving entities.

There is a project underway at the Administrative Conference of the United States (ACUS) that deserves some attention on this subject which we will build out to a separate post in the near future. ACUS has recommended that Agencies post their briefs and possibly other documents generated for courts in an easily accessible and cost free manner for all to access. That would close some of the access gap created by the current Tax Court electronic access rules. Follow that project here.

Changes to Admissions Procedures and Rules

The pandemic even changes the process of admission to practice before the Tax Court.

The Court adopted new rules including making permanent the limited entry of appearance rule. It’s not uncommon for the Court to adopt new rules in any year. These rules deal with general court procedures and demonstrate that even while it closed its building it was still working on refining the general rules of practice.

New judges arrived and guidance on remote practice came out.

Trying Cases Remotely

The handling of cases remotely has caused changes in many areas of Tax Court practice. It will be interesting to see how many of these changes have a long term impact and how many fade with the passing of the pandemic.

Subpoenas – New procedures for return of subpoenas discussed here.

Trials have been remote all fall. Most reports I have heard suggest that the trials have gone smoothly. Litigation without the ability to see witnesses in person and without the ability to hand a document to the clerk create some obvious difficulties but so far the Court seems to have surmounted these difficulties to keep the docket moving.

DAWSON

In July the Court adopted a new website.

In November it stopped electronic filing while it migrated to a new filing system named after one of the former judges, Howard Dawson. Every Tax Court practitioner received a new entry path and password to the new electronic filing portal as it reopened on December 28, 2020. Now we will find out how DAWSON works and how much better life is after the creation of the new system. I received my email from the Court on December 27 and filed a document I had been holding for a couple weeks. The filing went smoothly.

Another Look at 7508A(d) – Impact on Tax Court Jurisdiction

I wrote a post in April asking what does IRC 7508A(d) do. The section seeks to provide an automatic extension of the time to perform certain tax actions so that taxpayers did not have to wait and worry during the early days after a disaster. It was added to the code in late 2019 with little fanfare. When added to the code, no one considered a disaster such as the current pandemic. Based on the language of IRC 7508A(d) and the language of the potential triggering events, the possibility exists of an extension of time to perform certain tax actions not contemplated by the writers of the new provision and not yet acknowledged by the IRS. In April the post simply speculated on what IRC 7508A(d) might mean. A jurisdictional fight in the Tax Court will now test the section.

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The IRS Pronouncement

On November 18, 2020, the IRS announced interim guidance acknowledging the passage of 7508A(d) almost a year earlier. The announcement indicates a goal to place guidance in the IRM within the next two years. While it recognizes that the new statutory provision creates a mandatory 60-day period for relief from certain actions, it does not get specific about the application of 7508A(d) to any particular disaster. It makes no mention of how 7508A(d) might apply to the pandemic. Rather than answering questions regarding the IRS views of the applicability of the legislation, the guidance provides a heads up to IRS employees and leadership that the legislation occurred and must be addressed at some point.

The Tax Court Petition

In contrast to the high level acknowledgment of the existence of 7508A(d) in the interim guidance memo, on November 19, 2020 taxpayers who filed their petition late, under the ordinary definition of late, have filed a brief seeking to have the Tax Court acknowledge that the application of 7508A(d) renders their petition timely because of the extension provided when disaster, in this case the pandemic, strikes.

In the case of Lowe v. Commissioner, Dk. No. 4629-20, the petition was filed on March 9, 2020, the week the US seemed to recognize the threat of the pandemic and life as we previously knew it changed dramatically. Petitioner received a notice of deficiency dated December 2, 2019. The notice removed her self-employment income and as a consequence disallowed part of her earned income tax credit. Because of the potential benefits of the earned income tax credit, the IRS sometimes finds itself in the seemingly odd position of taking the stance that a taxpayer has not received earned income reported on a return since reporting earned income in certain situations can provide a net benefit due to the interplay of the credit and the applicable taxes.

Having received the notice of deficiency on December 2, 2019, Ms. Lowe had 90 days to file a Tax Court petition, which would have been Sunday, March 1, and because the 90th day fell on a Sunday, she had until Monday, March 2, to mail or deliver the petition to the Tax Court. Unfortunate for her but fortunately for blog writers and other followers of tax procedure, she mailed her petition on March 3, one day too late for the timely mailing provisions to protect her filing. The IRS duly filed a motion to dismiss the case for lack of jurisdiction. In response to that motion, Ms. Lowe stated that with young children at home and with the pandemic she was hesitant to meet with her tax preparer and to enter the post office to mail her petition.

The case is assigned to Judge Marshall who is one of two new judges sworn in late this summer. While new to the bench, Judge Marshall has plenty of experience at the Tax Court having served as Counsel to the Chief Judge prior to her appointment.

Prior to the passage of 7508A(d) Ms. Lowe’s concerns about the pandemic would not have assisted her because of the timing of her filing of the petition vis a vis the timing of the closure of the Tax Court clerk’s office and the timing of the IRS shutdown and issuance of postponements by the IRS and Treasury. While we have written several posts on the impact of closures caused by the pandemic, two posts, here and here, most closely relate to Ms. Lowe’s situation. These posts discuss the extended time to file Tax Court petitions. In the spring of 2020, two separate provisions assisted taxpayers with petitions sue. First, the clerk’s office of the Tax Court closed on March 19. This triggered the application of Guralnik. Second, the IRS used its discretion under IRC 7508A(a) on April 9, 2020, when it issued Notice 2020-23 exercising that power and stating that any Tax Court petition due between April 1, 2020 and July 15 2020 was due on July 15, 2020. Of course, both the Tax Court closure triggering Guralnik and the IRS announcement exercising its power under 7508A(a) come just a little bit too late to help Ms. Lowe and that’s where 7508A(d) potentially fills the gap.

Congress added 7508A(d) at the end of 2019 by putting it onto an appropriations bill. As discussed in our prior post on this subsection, it went unnoticed. The Congressional intent in passing 7508A(d) was to create a time period at the beginning of a disaster when taxpayers would receive relief without having to wait for the IRS pronunciation, wondering when relief might start and which obligations might be extended. Under subsection (d) the triggering event occurs automatically on the earliest incident date specified in the Stafford Act disaster declaration.

Ms. Lowe lives in New Jersey. President Trump declared the State of New Jersey a disaster area “beginning on January 20, 2020.” According to Ms. Lowe, triggered by this declaration residents of New Jersey get a 60-day extension to perform certain actions, including filing a petition in Tax Court. If she is correct about the operation of 7508A(d) in her situation, Ms. Lowe’s petition to the Tax Court changes from untimely to timely.

In its motion to dismiss the IRS failed to mention 7508A and how it impacted the timeliness of the petition. Now that it has been brought to their attention, perhaps the IRS will withdraw its motion and agree with Ms. Lowe that the operation of 7508A(d) did extend her time to file her Tax Court petition. Of course, even if the IRS withdraws its motion in acknowledgment of the statute, the Tax Court will still want to make its own jurisdictional determination since the IRS cannot confer jurisdiction on the court by withdrawing its objection.

As discussed in our prior post, the situation presents an unusual application of the statute because no one anticipated a nationwide disaster at the time of writing the statute. The brief filed by the Villanova clinic does an excellent job of explaining the statute and why, in this circumstance, the Tax Court has jurisdiction over Ms. Lowe’s case. There is no room in this post to cover all of the arguments made in the brief explaining the operation of 7508A(d). I will briefly mention a few of the important concepts.

Disaster Area

In deciding the scope of relief the covered area presents the first issue. The brief describes the use of this term in the statute:

Subsection (d) references the term “disaster area” twice: in defining who qualifies for the mandatory postponement, and in defining the length of the postponement period. The term “disaster area” is itself defined by reference to section 165(i) (5). Under that provision, a disaster area is an area “determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act.”

There are two types of Stafford Act declarations, which the statutory language does not appear to distinguish: emergency declarations under Title V of the Stafford Act, and major disaster declarations under Title IV. (The ABA Tax Section noted some concern about this ambiguity in an April 3, 2020 comment letter.)

Sometimes an emergency declaration and a disaster declaration will both be issued. The two declarations may have the same incident date (e.g. these Hurricane Sally emergency and disaster declarations), but the Stafford Act does not require it. In the case of the Covid-19 pandemic, there is a national emergency declaration which does not contain an incident date, and there are major disaster declarations for each state and territory which contain the beginning incident date of January 20.

While the statute does not distinguish between the two types of Stafford declarations, it is helpful that the Stafford Act is specified. Various other declarations and proclamations relating to the pandemic have been issued in addition to the Stafford Act declarations.

Postponement Period

Subsection 7508A(d) references a 60 day extension but the period can be long. Tom Greenaway discussed this aspect of the statute in an earlier post. The brief states:

The period to be disregarded begins “on the earliest incident date specified in the declaration to which the disaster area … relates” and ends on “the date which is 60 days after the latest incident date so specified.” Neither section 7508A nor section 165 provide a definition of “incident date” or “declaration”.

The period of postponement created by 7508A(d) is where the statute and the pandemic cause many to pause. While some disagreement might exist concerning the starting point for the extension period, the starting point is easy to identify compared to the end point in the case of a disaster such as a pandemic. FEMA often amends disaster declarations later to provide for a closing incident date. (E.g. see the first amendment to the disaster declaration for Hurricane Sally in Florida.) Currently, all of the covid-19 disaster declarations state that the disaster incident period is “beginning on January 20, 2020 and continuing.” Eventually these declarations will hopefully be amended to close the indecent period, but when this will happen is unknown. While we all hope that the coming vaccines will allow the pandemic to come to a relatively swift conclusion, not even Dr. Fauci knows exactly when the pandemic will end. By comparison a national emergency was declared on September 11, 2001 that is still in effect.

Qualified Taxpayers

Six ways exist for a taxpayer to qualify as having a connection with the disaster area including individuals whose principal residence is located in the disaster area. This is a relatively detailed and straightforward part of subsection (d) and it does not seem likely to be disputed in this case.

Mandatory Postponement for Qualified Taxpayers

This is another tricky spot. The statute provides that for qualified taxpayers the postponement period “shall be disregarded in the same manner as a period specified under 7508A(a)”; however, 7508A(d) does not otherwise specify which time sensitive acts are postponed (other than for pensions) nor does it provide any more detail on the triggering of the postponement period.

Ms. Lowe argues that subsection (d) automatically postpones her petition deadline because it automatically postpones all of the time-sensitive acts listed under subsection (a)(1)-(3). This is a broad list and the government may balk at the postponing of so many obligations for a currently unknown length of time. However, the statute provides no means for a Court to pick and choose between the acts listed in subsection (a). Despite its seemingly broad impact, Ms. Lowe argues that subsection (d) means what it says and that Congress meant business in providing mandatory and automatic relief to taxpayers in disaster areas.

Conclusion

The brief goes into much more detail that a blog post can. This case will be interesting to watch because of the significant implications it has for others who may have filed late during the period after the disaster began and because of other time periods that might be impacted by 7508A(d). I understand there is at least one other case making these arguments regarding a petition that was otherwise filed late in early March 2020. We welcome comments and information about further cases to which the suspension may apply.

Two Against One in Innocent Spouse Case Decided by Judge Vasquez the Subject of New Book

Innocent spouse cases and dependency exemption cases can seem like divorce court once-removed.  Most tax practitioners decide not to be family lawyers because they have personalities that are dry as toast and want to avoid the emotional rollercoaster of domestic disputes.  Nonetheless, taxes provide the opportunity for plenty of ongoing domestic disputes as the case of Leith v. Commissioner, TC Memo 2020-149 demonstrates.  For an excellent write up of the case you should also read Bryan Camp’s post on this case as part of his Lessons from the Tax Court.

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Judge Vasquez

Before I get to the case, I want to pause for a commercial interlude.  The Leith case is decided by Judge Vasquez.  This month the ABA Tax Section has published a biography of Judge Vasquez, From the Texas Cotton Fields to the United States Tax Court: The Life Journey of Juan F. Vasquez.  This is the first biography of a Tax Court judge and a remarkable story about his path to the court.  Judge Vasquez was originally appointed by President Clinton and became a senior judge in 2018 – the status all Tax Court judges must take when they reach the age of 70.  The path of each judge to the Tax Court differs but few follow a path remotely like the one taken by Judge Vasquez.

Intervention

When a taxpayer seeks innocent spouse relief, they usually begin by filing a Form 8857 with the IRS asking the IRS to abate all or part of a joint tax liability assessed against them.  The IRS has centralized consideration of innocent spouse requests in the Cincinnati Service Center, which is actually located in Covington, Kentucky.  At this location a group of IRS employees spend all day, every day reading the sad stories of individuals who have signed on for something they wish they had not.  When a taxpayer submits a request for innocent spouse relief, thereby becoming the requesting spouse (RS) in innocent spouse parlance, the IRS provides the non-requesting spouse (NRS) with notification of the request giving the NRS the opportunity to comment on whether the IRS should grant the request.  We have written about intervention before here, here and here.

Fears of Innocent Spouse Applicants

One problem with giving the NRS the notice of the innocent spouse request stems from the fact that some persons requesting relief have fled from the NRS as victims of domestic violence.  These victims often do not want the NRS to know that they have requested relief, because it could enrage their spouse or former spouse and lead to additional violence.  They also worry that making the request could alert the NRS to their whereabouts.  While the IRS does not provide the NRS with the Form 8857, the NRS can obtain the form and other data through FOIA.  The IRS would seek to protect the address and other identifying information in the case of an innocent spouse request involving domestic violence, but the RS would rightfully be nervous about relying on the IRS to carefully redact everything that might serve to identify where they lived.

I have had victims of domestic violence come to my clinic seeking assistance who backed away once they learned that the NRS could have access to the information submitted even if it was limited access.  In those cases there are strategies to pursue to protect the RS and still provide some relief.  The safest strategy for obtaining relief in that situation is probably an offer in compromise.  For one spouse to compromise a joint debt does not allow the other spouse to comment or see the file.  Some clients have even been concerned about that level of information sharing with the IRS and prefer to just wait out the statute or at most seek currently not collectible status.

Finding an Ally in IRS

In this case Ms. Leith finds the IRS in agreement with her application for innocent spouse relief.  In a case in which the NRS has intervened, a petitioner cannot simply sign a decision document with the IRS agreeing to the result.  So, the case goes to trial even though the taxpayer and the IRS agree as to the result.  This procedure gives the NRS the opportunity to keep the RS from leaving the NRS as the only liable spouse.

I certainly do not know the whole back story, but the timing of the tax problem lines up with the economic problems the country faced following the Great Recession.  My clinic still serves several clients who trace their tax problems back to that recession.  At the time the recession began petitioner worked at home taking care of the children while NRS had a job outside of the home which he lost in 2009.  Petitioner took a job as a waitress while NRS formed a partnership with two others to clean out foreclosed homes.  Petitioner had no connection to the business.

The couple’s financial difficulties continued into 2010 and 2011.  She tried to find a position in the mortgage industry where she had worked before becoming a mother but was unsuccessful and ended up working more shifts as a waitress.  NRS withdrew money from a retirement account.  Early withdrawals were so common following the Great Recession that the students in my clinic at the time became experts in IRC 72(t), seeking to find ways to fit the client into an exception to the imposition of the 10% excise tax.  When I turned 59 and ½ they threw me a 72(t) party complete with cake and decorations.  That’s how focused we were on that life milestone because of the number of clients we had draining their retirement accounts.  It was good to see that Congress had learned from that experience and provided some relief for this problem in the CARES Act.

The returns were audited resulting in additional tax.  They also filed their 2013 with a balance due and no remittance.  In Tax Court both were pro se; however, by virtue of having the IRS in agreement with her, petitioner in certain respects did have representation.  For example, when the NRS sought to introduce documents not properly exchanged prior to trial, the IRS attorney objected to the violation of the Court’s order and succeeded in keeping the documents out of the record.  Having persuaded the IRS, the petitioner also had an advantage in persuading the Court regarding her credibility in a case that became somewhat of a he said/she said.  Much of the opinion describes her credibility and the NRS failure to bring forth credible evidence.  Nowhere does credibility become more important than in her allegations of abuse.

The administrative record in the case at bar provides a detailed account of intervenor’s psychological abuse and physical intimidation of petitioner. In her second request petitioner stated unequivocally that she had been a victim of spousal abuse or domestic violence. She attached to the second request a letter containing detailed descriptions of intervenor’s abusive behavior. Such behavior included: (1) locking petitioner out of the house when she was pregnant because he was angry that petitioner had left the house to run an errand and (2) screaming at petitioner and kicking household objects. Petitioner also discovered three large kitchen knives underneath her mattress, causing her to fear for her and her daughters’ safety.

The trial record reinforces the abuse allegations petitioner made during the administrative process. At trial petitioner credibly testified that intervenor was controlling and prone to outbursts.

Spouses who can prove abuse stand a very high chance of success in an innocent spouse case because such abuse pervades all of the factors in Rev. Proc. 2013-34 published by the IRS to set out the criteria for determining innocent spouse status under IRC 6015(f).  Although not required to do so, the Court here faithfully followed the factors set out in the Rev. Proc.  The Court goes so far in following the Rev. Proc. as to base its determination on the streamlined factors in the Rev. Proc.:

We find that petitioner is entitled to streamlined relief from joint and several liability pursuant to section 6015(f) for the years at issue to the extent of the tax items attributable to intervenor.

Nothing in the statute or regulations mentions regular or streamlined paths to innocent spouse relief.  It is interesting that the opinion reviews her qualifications for a streamlined path to victory.

Also interesting in this case is the determination of abuse.  The IRS, unlike many state laws concerning abuse, creates a recognition of abuse that does not require physical abuse.  This case involves non-physical abuse.  The IRS and the Tax Court deserve kudos for recognizing that many forms of abuse do not involve mere physical actions.  The abuse discussion in the opinion is not unique in Tax Court jurisprudence but does a good job of highlighting that the path to proving abuse need not go through the hospital emergency room.

Conclusion

This is not a precedential opinion.  Perhaps there is little new here but the opinion reinforces the importance of the non-binding Rev. Proc.; displays the benefits of having the IRS on your side in court; and provides a good example of abuse in a situation in which the petitioner did not suffer physical abuse.