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.

Breaking Rule 36: When IRS Fails To Answer a Petition

Bob Kamman returns with a tale of woe that will hopefully be short-lived. I trust the matter will be resolved promptly once Bob is able to communicate with the Chief Counsel attorney assigned to the case. The situation shows the importance of the Answer telling the petitioner or representative who they can call to resolve their case. Too frequently it seems that IRS correspondence exam jumps the gun and issues an unnecessary notice of deficiency. Like Bob, my practice is to file a petition in these cases without waiting the full 90 days. I have not had any luck asking the IRS to rescind a notice of deficiency under section 6212(d) on the basis that exams reviewed and accepted my client’s substantiation after issuing the SNOD, so I may as well get the petition done early. A streamlined rescission process for cases like these would avoid unnecessary petitions filed by us cautious and pessimistic lawyers. Christine

I’m the Rodney Dangerfield of tax practitioners.  I get no respect.  At least from IRS, in Tax Court.

Other lawyers who blog or comment here: They file a Tax Court petition, IRS files an answer.  When I file a petition? It’s ignored. 

See Docket No. 19789-19.  Filed November 1, served on IRS November 6. Tax Court Rule 36 grants IRS a generous 60 days to file an answer.  That time expired January 6 (because January 5 was a Sunday). 

Compare that to  Docket No. 19787-19P , filed a few days after my case  and served the same day as mine.  The petitioner there is represented by Keith Fogg, who gets respect.  IRS filed an answer in that case on December 20, even though they had to send it to Kentucky for a lawyer who handles passport cases. 

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You might notice that I requested Washington, D.C., as the place of trial.   I thought that would expedite settlement.  Maybe IRS has less respect for practitioners who seem to be forum shopping.   I knew there was no way this case would go to trial, because it would be easy to settle once I could talk to a real person.  The disputed tax with interest  involves about $2,000, enough that a 3% filing fee was not out of line. 

It’s not like an IRS answer reflects more than a cursory look at the petition.  Most answers consist of a couple pages denying everything for lack of sufficient knowledge or information, up to but usually not including that the sun sets in the west.  But at least they provide the name of the attorney assigned to the case.

The lack of respect, however,  did not begin with IRS ignoring my Tax Court petition.  Its notice of deficiency was issued because my response to an IRS notice was ignored.   I had explained the mistake  on Schedule D was due to some missing Form 1099-B stock sales.

IRS sent its infamous CP-2000 on July 22, 2019, proposing a tax increase of $4,761.  (Being less than $5,000,  it was not quite enough to slap on the computer-generated Section 6662 penalty of another 20%.)

My letter to IRS on August 6 provided correct information.  It included copies of the relevant Forms 1099-B; and a 1040 (marked “Information Only, Do Not File”) showing the tax computation and a balance due of $2,847.  

On September 20, IRS mailed my clients a notice acknowledging they received my letter on August 12 and informing them that it would need another 60 days to respond.  But perhaps not coincidentally, the federal government fiscal year was ending soon.  Did Ogden Service Center managers exert  pressure to close cases so  year-end statistics would shine?  Not that they would admit.

Whatever the reason, a notice of deficiency dated October 15 was issued, showing the same adjustments as those on the original CP-2000.  It completely ignored the explanation I gave two months earlier.  Obviously, I get no respect. 

Hoping to move this case closer to settlement before the busiest days of the 2020 tax season, I filed the Tax Court petition a couple weeks later.  At some other time, in some other case, I would just wait and see how long it would take for IRS or the Tax Court to discover I had fallen through the cracks.  But my clients want to be done with the matter, and have already made an advance payment (Code Section 6603, Rev. Proc. 2005-18) of what they actually owe. 

(No, they are not paying me a fee, other than what I have received from them and their family in the last three decades as clients.   I could try to pursue IRS for fees, but life is too short for such bureaucratic ordeals.)

And filing the petition did get us some attention from IRS.  On November 18 – two weeks after Chief Counsel received the petition – IRS in Ogden mailed a revised CP-2000 proposing tax of only $3,057.  The $210 difference from our figures was due to keeping the tuition tax credit instead of changing it to a deduction, which saved money at the higher AGI.

The November 18 notice tells us, toward the bottom of Page 6, that “to recalculate your tax, we used . . .the new information you provided.”

Respectfully, may I ask anyone in charge at IRS (if that label is not an oxymoron): Why do you issue a notice of deficiency first, then look at the information provided?  Would it not be more efficient to do it the other way around?

The word “respect” does not appear in the part of the Taxpayer Bill of Rights (as explained in Publication 1) under “The Right To Quality Service.” It does promise, “Taxpayers have the right to receive prompt, courteous, and professional assistance in their dealings with the IRS.”

Oddly enough, “respect” appears later, in this context:

Taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections, and will provide, where applicable, a collection due process hearing.

The heading for that paragraph is “Right To Privacy.”  Tax Court proceedings offer little privacy.  Well, there is that thing about redacting SSN’s. 

I did some research on Tax Court procedures when IRS files a late answer.  The issue does not appear often, if at all.  I think it is safe to say: File a petition late, and the Court will dismiss the case for  jurisdictional reasons.  File an answer late, and the Court will excuse IRS on equitable grounds. 

Volunteers Needed at Upcoming Las Vegas Calendar Calls

Several years ago the ABA Tax Section undertook the project of covering all Tax Court calendar calls to make sure that unrepresented taxpayers had an attorney to whom they could ask questions and obtain guidance at the calendar call.  The project was a success and volunteers were secured for calendar calls in all of the cities in which the Tax Court sits; however, life is dynamic rather than static.  Recently, both low income taxpayer clinics in Las Vegas have closed.  While there is hope that one or both or a new one may reopen in the future, at the moment the Tax Court will hold calendars on January 13 (next week; this is a mixed regular and small case calendar) and February 24 (this is a regular calendar).  Volunteers are needed for both calendars in order to provide coverage for any unrepresented taxpayers who may appear.

When a similar coverage hole occurred in Honolulu six years ago, Andy Roberson jumped into the breach and covered the calendar.  The Pro Bono and Tax Clinic committee of the Tax Section hopes that one or more tax controversy specialist will quickly jump in to cover the upcoming calendars in Las Vegas.  If you are willing to help cover one of the upcoming calendars in Las Vegas, please contact the Tax Section’s Chief Counsel, Meg Newman at Megan.Newman@americanbar.org or by phone at (202) 662-8645.

Sanctions, Converted Items Confusion and More, Designated Orders: October 14, 2019 – October 25, 2019

Only one order was designated during Patrick Thomas’s week, the week of October 14, 2019, and two during mine, the week of October 21, 2019. As a result, this is a joint post from Patrick and me covering both weeks. It begins with Patrick’s coverage of the one order designated during his week.

Docket  No. 12646-19, Brown v. C.I.R. (Order Here)

This short order displays the power of the Tax Court to sanction taxpayers who raise frivolous arguments or institute proceedings in the Court merely for purposes of delay. The Tax Court has a busy docket, handling approximately 25,000 new cases each year. Frivolous claims and proceedings instituted merely for purposes of delay clog that docket, at the expense of taxpayers who have legitimate disputes with the Service.

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This case deals with Petitioner’s 2008 federal income taxes—with a petition filed on July 9, 2019. Given that timing, Respondent unsurprisingly filed a motion to dismiss for lack of jurisdiction, presumably arguing that Petitioner failed to file the petition within 90 days of the notice of deficiency.

The Petitioner in Brown had previously filed three cases in the Tax Court. In Docket 7375-18, he failed to pay the Court’s filing fee, and the case was accordingly dismissed. In Docket 4754-19, he raised a constitutional challenge to paying the filing fee, which the Court swiftly disposed of; constitutional challenges to the payment of filing fees are rarely successful. And after all, if Petitioner had a financial inability to pay the fee, the Tax Court provides a remedy through the fee waiver application. 

Finally, in a case entitled “Estate of Ernest Richard Brown v. Commissioner”, at Docket 12335-11, the Court likewise dismissed the case due to failure to pay the fee and to properly prosecute the case.

Judge Carluzzo, in the present order in Docket 12646-19, notes that “a copy of the notice of deficiency [for 2008] is attached to the petition filed May 24, 2011,” but that in the present case, Petitioner denied ever receiving the notice. Accordingly, he regards that allegation as “patently false”.

Accordingly, Judge Carluzzo not only grants Respondent’s motion to dismiss, but also imposes a $500 penalty for the “frivolous pleading” in this case. I’m not sure if this low amount will dissuade Petitioner from continuing to challenge the liability. But as we’ve seen before, further frivolous proceedings will only lead to escalating penalties. And while the 6673 penalty is limited to $25,000, the penalty is imposed on any “proceedings” instituted before the Court—suggesting that the penalty could exceed $25,000 if Petitioner continues to file frivolous pleadings.

Docket Nos. 1143-05, 1144-05,1145-05, 1334-06,1335-06, 1504-06, 20673-09, 20674-09, 20675-09, 20676-09, 20677-09, 20678-09, 20679-09, 20680-09, 20681-09, David B. Greenburg, et. al. v. C.I.R. (Order Here)

This order involves a long-running consolidated, in-part TEFRA-related and in-part-deficiency-related case. It previously had orders designated during my week in September, which I didn’t specifically address, but now feel is unavoidable.

I must admit its significance is a bit lost on me – likely because it lives (somewhat) in the world of partnerships and TEFRA. 

The case was already heard, decided (the opinion is here) and is in the computation stage, but the petitioners moved the Court to dismiss the case for lack of jurisdiction in August and the Court addressed- and denied – the motion. This most recent order was filed in October and asks the Court to reconsider that denial. 

The October motion reiterates the arguments in the August motion, which seem to also be arguments that were addressed in the opinion (but with more focus on an issue with the partnership’s TEFRA election).

So what is it that petitioners keep arguing about? The IRS had sent notice to the petitioners about converting certain specified items into non-partnership items as result of a criminal investigation. This is permitted by section 6231(c)(1)(B). Once the items are converted, they are subject to deficiency proceedings rather than TEFRA proceedings because they are no longer considered to be partnership items.

Petitioners argue the Court does not have jurisdiction because the IRS asserted that certain items were converted items, when they were actually non-partnership items. This confuses the Court, because converted items are considered non-partnership items.

In other words, the crux of the petitioners argument is that a distinction should be made between “partnership items originally, but converted under TEFRA into nonpartnership items” and “items that aren’t converted into nonpartnership items by a converted items notice of deficiency because they are already nonpartnership items” and the Court doesn’t have proper jurisdiction over the latter.

The Court said it cannot make this jurisdictional distinction without some legal authority for doing so. It finds that it has jurisdiction over all of the items, even though the way in which the items became subject to the Court’s jurisdiction differed.

The Court acknowledges that the parties have preserved this issue for appeal (which is likely petitioners’ goal) and denies petitioners’ motion to dismiss yet again. 

Docket No. 17286-18, Michael Sestak v. CIR (Order Here)

In this order, Judge Buch holds the IRS to a high standard (ironically, its own) when applying the last known address rule.

Petitioner notified the IRS of his change of address when he began serving a five-year sentence in a federal prison – the only part that he did not communicate was his prison registration number, which is the number used to identify individual inmates. The IRS received this correspondence because petitioner also requested an abatement of failure to file penalties due to the reasonable cause of his imprisonment, which the IRS granted.

In addition to petitioner’s correspondence, a relative of petitioner sent a letter to the IRS that discussed petitioner’s prison sentence and included petitioner’s new address, this time with his prisoner registration number. The IRS retained this letter in its records.

Then the IRS sent petitioner a notice of deficiency to the address petitioner provided without the prisoner registration number. The petitioner never received the notice of deficiency and only became aware of it after he started receiving collection notices. A year and a half after the notice of deficiency was sent, petitioner petitioned the Tax Court.

IRS moves to dismiss the case for lack of jurisdiction because the petition was not timely filed, arguing that it reasonably relied on petitioner’s letter (which, again, did not list the prisoner registration number) when it sent the notice to petitioner’s last known address.

If the IRS does not exercise reasonable diligence and sends a notice of deficiency to an incorrect address, the notice of deficiency is deemed invalid. The Court addressed this issue more generally in Keeton v. Commissioner, holding that the IRS did not use the last known address when it knew the taxpayer was incarcerated and didn’t send the notice to the prison.

This order takes that decision one step further. The IRS was aware of the incarceration and sent the letter to the prison, but the Court still finds that that wasn’t enough.

Referencing the IRM (while acknowledging its non-precedential value), the Court states,

The Commissioner’s own manual gives instructions for mailing notices of deficiency to incarcerated taxpayers. The Internal Revenue Manual (IRM) states that the address on the notice of deficiency “should reference the prisoner locator number, if available.” The IRM provides a link to the Bureau of Prisons website where Service personnel may find prison locator numbers and addresses. The IRM thus states that a complete address for a prisoner contains the prisoner registration number and then provides a link to find that number. Therefore, the Commissioner knew he had an incomplete address for [petitioner] because the IRM stated that a prisoner address should contain the prisoner’s registration number.

The IRS asserts that it acted reasonably because the notice was sent by the Automated Underreporter System to the address on file. The Court finds that requirements under the last known address rule of section 6212(b) do not depend on which system the IRS uses to mail the notice and due diligence is required when the IRS is aware an address is incorrect or incomplete. The Court dismisses the case for lack of jurisdiction but not on the IRS’s proposed basis, but rather on the basis that the notice of deficiency was invalid since it was not sent to the taxpayer’s last known address.

Tax Court Tips From Judge Vasquez

For the week of October 21 to 25, Judge Juan Vasquez held sessions in the two jurisdictions my clinic covers in order to provide free consultations to unrepresented petitioners. Judge Vasquez had a swing session, covering Kansas City, Missouri, for Monday through Wednesday and Wichita, Kansas, for Thursday and Friday.

On October 22, Judge Vasquez was part of a CLE put on by the Federal Bar Association titled “How to Try Your Best Case Before the Tax Court.” He wound up being the sole judge presenting so with the moderator it became more of an informal question and answer session. Those in attendance included private practitioners, IRS counsel and LITC clinicians.

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Even though the session was less formal, Judge Vasquez did want to incorporate a presentation along the lines of the CLE’s title. Along those lines, he provided 7 tips for improving your case in the Tax Court arena. While I do not presume to speak for him, I will try to provide a summary of his presentation but will take blame for any misstatements.

The pretrial memorandum is the first item mentioned on the list. It is so important because it is your side’s ability to tell the case to the judge regarding the years at issue. You can educate the judge on the facts and the law from your point of view before the trial begins. Since this is a way to state your side’s argument without the other side objecting, it is a wasted opportunity when a party skips the pretrial memo.

Next, submit a timely stipulation of facts. The stipulation of facts is the collection of facts that are not in dispute by the parties, with evidentiary documents supporting those statements. The stipulations often contain statements such as when the petitioner filed tax returns for the years in question, when the IRS mailed a notice to the petitioner, and when the petitioner submitted a petition to the Tax Court that the parties are not arguing about.

I had asked the judge to expand on his comment about the connection between the stipulation of facts and Tax Court jurisdiction.  He pointed out that a notice such as the notice of deficiency or notice of determination is what allows the Court to have jurisdiction to hear the case as that is the supporting document for the petitioner to base the petition of the underlying case upon.  If the petitioner does not agree to a stipulation of facts, that could cause some concern about the Tax Court’s jurisdiction.  It is likely not a large issue since the parties will likely introduce the notice in some other fashion.  Some easier examples are if the petitioner might have attached the notice to the petition or that the IRS generally attaches the complete notice to the answer.

He did bring up a Tax Court Rule 91(f) motion to compel stipulation if a party refuses to comply regarding stipulations. That rule is for formal discovery, though, requiring the submission of the motion 45 days prior to the calendar call. When a petitioner is not compliant on the date of calendar call, the Rule 91(f) motion to compel is not timely.

In the alternative, the parties can submit a case fully stipulated to a judge under Tax Court Rule 122. Keith wrote about the perils of submitting a case fully stipulated here.

The third tip is to let the witnesses testify. If you are building your case on what the witness is saying, you should not have the attorney testifying instead. For example, when an attorney is questioning his or her own witness, do not do that by a series of leading questions. The judge finds that boring. Instead, let the questions be open so that portion of the trial is about the witness’s testimony. Then, you have something to cite to if you need to file a brief following the trial.

If you have a slow witness, you can signal that to the Court if you need to use leading questions. It should not be the default place to start when you are questioning your witness.

Fourth, settle the minor issues. Attorneys often want to argue the major issues and will focus a trial in a clash on the big topics. The judge, on the other hand, needs to make sure everything gets resolved for the issues in the case. He said that judges often have to spend the most time in an opinion making decisions on the minor issues. If counsel does not want to spend time focused on minor issues, they should settle those and get them out of the way for all concerned.

The fifth tip regards using experts. Tax Court Rule 143(g) requires the submission of expert reports 30 days before calendar call. Submitting the reports in a timely fashion allows opposing sides enough time to object before trial so they are not objecting at day 1 of the trial. By not waiting until the last minute, that will help the trial to flow smoothly rather than dealing with objections regarding experts at the start of trial.

Effective cross-examination of the other side’s witness will show the inconsistencies in the other side’s case. It can then become a battle of the experts to show which side has the better expert backing up the case. It is essential for the attorney to read the expert reports for both sides. There have been trials where the attorney was not familiar with the subject an expert would testify on and looked bad when it came to questioning the expert.

Sixth, it is always a good idea to review the Evidence rules on objections and leading questions prior to trial. A quick refresher can be quite handy to stay current and use proper court procedure at trial.

Last, follow the judge’s direction on when to file briefs with the Court. A brief is your last chance to provide to the judge the opinion you want the Court to render. Do not use words like “definitely”, “clearly” or “obviously” when arguing your side of the case. For your requested findings of fact, do not quote to the entire record, but cite a specific page or paragraph in the transcript.

While there were other topics discussed in the informal question and answers, Judge Vasquez’s presentation on trial tips certainly gave those in attendance useful material to use when dealing with Tax Court.

Tax Court Proposes New Rules

On November 25th the Tax Court issued a press release announcing proposed amendments to its rules and a new fee schedule.  The amendments do not make major changes to the rules.  Essentially, the amendments make a few stylistic changes to the language of the affected rules and they replace Appendix II of the current rules with a reference to the Court’s web page and its schedule of fees and charges on the site.  The web page containing the Court’s fees has not been updated since 2016.  The proposed fee changes are contained in the press release at the end of the release.

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Based on the proposed fee changes, the Tax Court will remain one of the cheapest courts in which to file a petition.  At $60 for a petition, the cost of filing in the Tax Court has got to be one of the great bargains at this point.  For that small fee you get full access to the Tax Court no matter whether you are Google or an individual with modest income and no matter whether your case will have 100 motions or none.  There are no add ons once you are in the Tax Court.  It does not charge an additional fee for certain actions in the case.  It also regularly waives the fee with little fuss for individuals who are low income.

The biggest change occurs in the section on the “Periodic Registration Fee.”  Here is the change and the explanation:

(g) Periodic Registration Fee: (1) E The Court is authorized to impose on each person admitted to practice before the Court shall pay a periodic registration fee. The frequency and the amount of such fee shall be determined by the Court, except that such amount shall not exceed $30 per calendar year. The Clerk shall maintain an Ineligible List containing the names of all persons admitted to practice before the Court who have failed to comply with the provisions of this paragraph (g)(1). No such person shall be permitted to commence a case in the Court or enter an appearance in a pending case while on the Ineligible List. The name of any person appearing on the Ineligible List shall not be removed from the List until the currently due registration fee has been paid and arrearages have been made current. Each person admitted to practice before the Court, whether or not engaged in private practice, must pay the periodic registration fee. As to forms of payment, see Rule 11.

(2) The fees described in paragraph (g)(1) of this Rule shall be used by the Court to compensate independent counsel appointed by the Court to assist it with respect to disciplinary matters. See Rule 202(h).

Explanation

It is proposed that Rule 200(a)(2) and (3) be amended to delete references to Appendix II and replace them with references to the new Fee Schedule, which will be available on the Court’s website. It is also proposed that Rule 200(g)(2) be deleted. Code section 7475(b) describes how the Court may use periodic registration fees.

Most readers will scratch their heads trying to understand what the periodic registration fee is and when they should pay it.  A good reason for scratching your head about this fee is that only Tax Court bar members of a certain vintage will ever have paid this fee.  In my 40+ years of membership in the Tax Court bar I have paid it once.  The one time the periodic fee was imposed during my tenure, it was small but that did not stop those of us working for Chief Counsel from complaining since we had to pay it out of our own pockets.  As a government attorney you have a duty to complain about things like this.  The rule change does not signal that the court is about to impose a periodic fee again but simply provides that if it does the fee will be no more than $30 a year and the money collected will not go just to pay attorneys the Tax Court hires to go after members of its bar with possible disciplinary issues. 

For readers not intimately familiar with IRC 7475(b), the periodic fees can not only pay for hiring independent counsel but can also be used “to provide services to pro se taxpayers.”  The Tax Court regularly uses the fees to pay for costs that benefit pro se taxpayers such as paying for its web site explanations and paying for translators to assist with their cases.  By allowing the Tax Court to use periodic fees for this purpose, Congress fosters the already welcoming atmosphere that the Tax Court creates for pro se litigants.

Speaking of complaining, my one complaint about the proposed change in the fee schedule is that it does not reduce the fees for requesting copies or differentiate between parties making the requests.  The Tax Court is not a part of PACER.  Therefore, it is not a part of the ongoing litigation about the high cost of PACER fees; however, it’s interesting to note that the “high cost of PACER fees” alleged in the ongoing litigation concerning access to public documents involves fees considerably lower than the Tax Court’s fees and involves a system that routinely grants free access to documents to occasional users and users from organizations representing low income individuals.  There’s more to the issue than just fees and the Tax Court offers for free all of its orders (not only providing them gratis but providing a magnificent search feature).  Comparing the Tax Court’s public access provisions to PACER is somewhat, but not totally, apples to oranges.  Still, the Tax Court could make documents more accessible and cheaper.  As someone who regularly visits the Tax Court’s docket room to research cases on upcoming calendars in my city and for other purposes, I would appreciate a closer look at both access to and fees for the court’s documents.  We have previously written about access issues here and here.

Love, Legal Fees, and the Origin of the Claim: Designated Orders September 23 – September 27, 2019

Despite a relatively small number of orders designated during the week of September 23, they were diverse and interesting. I discuss three below, but the orders not discussed addressed: IRS’s motion for summary judgment in a case where petitioner cited the book, “Cracking the Code” to support his position (here); and a motion to stay (here) and a motion to dismiss for lack of jurisdiction (here) from petitioners in a consolidated docket case involving converted partnership items.

Docket No. 15277-17, Maria G. Leslie v. C.I.R. (order here)

This first order piqued my interest because it covers a topic that comes up in the individual income tax class that I teach every year. The order addresses the IRS’s motion for summary judgment and the case involves alimony and the deduction for legal fees under section 212. The Tax Cuts and Jobs Act separately impacted both of these issues by eliminating the income inclusion (and corresponding deduction) of alimony for divorces decreed post-2019, and by suspending miscellaneous itemized deductions (so below-the-line attorney’s fees cannot currently be deducted). The analysis in this order is still helpful and relevant to past, and perhaps, future years.

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A deduction for legal fees is allowed when the fees are incurred to produce or collect income. Since alimony is considered income by virtue of section 71(c) legal fees related to alimony could be deducted, prior to the TCJA changes. Legal fees related to other costs of divorce are not deductible, so it is important that taxpayers (or more importantly, their divorce attorneys) distinguish between the fees paid for each cause of action.

To determine whether the fees are deductible, the Court must look to the origin of the claim and not the taxpayer’s purpose or desired outcome in the case.

In this specific case, there is a lot at stake for the petitioner. Her ex-husband worked with the firm that handled the class action lawsuit against Enron and for which he received a $50 million fee after the marriage ended.

Originally, a marital settlement agreement (“MSA”) was reached which entitled petitioner to 10% of her ex-husband’s earnings. The amount received under the MSA was determined to be alimony income to the petitioner in an earlier Tax Court case.

Later, petitioner had second thoughts about the MSA and incurred legal fees in three separate proceedings: 1) to set aside the MSA for lack of legal capacity, 2) for an order to show cause as to why she should receive the percentage of earnings as dictated by the MSA nevertheless (her ex-husband deposited her percentage into a trust account for her benefit, but she was barred from accessing it), and 3) for damages for breach of fiduciary duty to her with respect to the MSA negotiations under California Family Code which allows a suit for damages if a breach by her ex-husband results in impairment to her undivided one-half interest in the community estate.

The Court looked to origin of the claim for each proceeding and determined that petitioner was only entitled to deduct legal fees for the second proceeding, because it related to the alimony income in the trust account and her ability to collect it. The IRS’s motion for summary judgment was denied with respect to this part.

The other proceedings were not entitled to a legal fee deduction because the origin of the claim in the first proceeding was related to a flaw in the MSA, and in the third proceeding arose from a duty that her ex-husband had to her as a result of their marriage. In other words, the origin of the first and third claims did not involve the production or collection of income. The IRS’s motion for summary judgement was granted with respect to these parts.

The parties were ordered to submit settlement documents or a status report by the end of November.

Docket No. 6446-19L, Wendell C. Robinson & May T. Jung-Robinson (order here)

In this order the petitioners have filed a motion for summary judgment because they believe they have already paid their 2012 liability of $88,000 with a combination of withholding and a check sent with their return. They argue that as a result of the liability being paid in full, and since the assessment statute is closed, the IRS’s proposed levy cannot be sustained.

In response, the IRS explains that the petitioners’ return contained mathematical errors, so they owed $13,267.20 more than what their return originally reflected. The IRS used its math error authority to correct the returns, so no notice of deficiency was issued. There has been considerable coverage by PT on various math error authority issues (for example: here and here) and it was an “Area of Focus” in former NTA, Nina Olson’s Fiscal Year 2019 Objectives Report to Congress.

The Court has an issue with the IRS’s use of math error authority in this case – mainly that Appeals’ notice of determination makes no mention of the mathematical corrections permitted by section 6213(b)(1), nor of whether the petitioners were notified of the corrections, as required, to give them an opportunity to request abatement. Abatement can be requested under section 6213(b)(2)(A) and doing so entitles the taxpayer to deficiency procedures.

The Court would like more evidence on this issue, so it denies petitioner’s motion.

Docket No. 17799-18L, Michael Balice v. C.I.R. (order here)

This case involves an interesting scenario in the CDP world that I have not encountered – it is one where a taxpayer timely requests a CDP hearing but is not provided with one. Keith covered the topic in 2015 (here), and in 2016 (here) after the IRS provided guidance on how its attorneys should handle the issue in Chief Counsel Notice (“CC”) 2016-008. The issue has also come up in at least one other designated order post (here).

In this order, it appears that Counsel may not have adhered its own guidance and the IRS has moved to dismiss the case alleging that the petitioner took only frivolous positions in his CDP requests for a levy and lien.

The IRS argues that the Court should grant summary judgment in their favor because they did not violate petitioner’s due process rights by denying him a CDP hearing. In the IRS’s view, petitioner had an opportunity to raise issues regarding his liability and the validity of the lien in other courts (because the DOJ had the case for a period of time) and petitioner’s request was properly disregarded because it only raised frivolous issues. IRS also argues that there is no benefit to remanding the case to Appeals, which the Court may be permitted to do, because of petitioner’s frivolous arguments and because Appeals lacks the authority to compromise petitioner’s liability due to the DOJ’s involvement.

The Court isn’t convinced by the IRS’s arguments and reviews the history of the case. Earlier on, as a result of the Office of Appeals’ view that the petitioner’s request was frivolous, it did not communicate with the petitioner in any of the usual ways. The petitioner did not receive an explanation of the process and Appeals did not request any financial information.

The only correspondence Appeals sent to petitioner was a notice of determination sustaining the NFTL (petitioner’s request related to his proposed levy was not timely). This denial of a CDP hearing is permitted under section 6330(g), but Thornberrypermits the Tax Court to review the “non-hearing” for an abuse of discretion.

That opportunity for review is potentially helpful for petitioner in this case. The Court reviews the form letter that petitioner submitted with his CDP request and nothing seems frivolous about it.  If only some portions of petitioner’s request are frivolous, then Appeals may have abused its discretion in denying the CDP hearing. The Court also identifies a section 6751 supervisory approval issue and the IRS has not demonstrated it has met its burden. As a result, rather than grant the IRS’s motion, the Court sets the motion for argument during the upcoming trial session.

Affidavits in Summary Judgment – Designated Orders: September 16 – 21, 2019

Only one order this week, but it’s a meaty one. Judge Halpern disposed of three pending motions from Petitioner in Martinelli v. Commissioner, a deficiency case. Let’s jump right in.

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Docket  No. 4122-18, Martinelli v. C.I.R. (Order Here)

So begins the tale of the brothers Martinelli: Giorgio, the Petitioner in this Tax Court case, and Maurizio, the generous yet problem-causing sibling who—according to Giorgio—created an Italian bank account in Giorgio’s name in 2011. Giorgio argues that he never had knowledge of or control over the Italian bank account; he was a mere “nominee” on the account. He first learned of the account in September 2012.

The IRS, as one might expect, alleged that Giorgio didn’t report the income from the account on his federal income tax returns for 2011 through 2016. To boot, the IRS assessed a penalty under section 6038D(d) for failure to disclose information regarding a foreign financial assets where an individual holds foreign financial assets exceeding $50,000 in value. (NB: This penalty is distinct from the Foreign Bank Account Reporting, or FBAR, penalty found at 31 U.S.C. § 5321. Unlike the FBAR penalty, the IRS may collect the section 6038D(d) penalty using its ordinary collection mechanisms, including the federal tax lien).

Petitioner filed three motions: first, a motion for partial summary judgment to determine that the Tax Court has jurisdiction regarding the section 6038D(d) penalty; second, a motion to restrain assessment and collection of the penalty while the Tax Court case is pending; and third, a motion for partial summary judgment regarding the underlying income tax deficiency.

Jurisdictional Motion

The Court rightly held that it lacks jurisdiction as to the 6038D(d) penalty. As the Tax Court likes to repeat, it is a court of limited jurisdiction. Congress must provide the Tax Court with the authority to hear particular cases. While certain penalties fit into Congress’ grant of authority under the Tax Court’s general deficiency jurisdiction under section 6211(a) and section 6214, this penalty simply doesn’t.  

Judge Halpern reviews the Court’s jurisdiction under section 6211(a). It includes taxes imposed under subtitle A or B, or under chapters 41, 42, 43, or 44. But section 6038D is in Chapter 61 of subtitle F. So no luck there.

Likewise, the penalty isn’t an “additional amount” under section 6214. Tax Court precedent has confined this jurisdictional grant to penalties under subchapter A of chapter 68. See Whistleblower 22716-13W v. Commissioner, 146 TC 84, 93-95 (2016). Failing to find a jurisdictional hook, the Court denies summary judgment on this matter, holding that the Court does not have jurisdiction with respect to this penalty.

Is this the right result as a policy matter? I think not. The IRS likely assessed this penalty during the audit of Mr. Martinelli’s tax return, in addition to the deficiency it proposed. One result of the audit is subject to challenge in the U.S. Tax Court; the other isn’t. Yet a challenge to both may rely on the same set of facts. Why require a taxpayer to litigate twice?

Motion to Restrain Assessment & Collection

The Court’s disposition of the first motion makes the second easy. If the Court can’t determine the amount of the penalty, it certainly can’t tell the IRS not to collect the penalty. This motion is likewise denied.

The Deficiency

Giorgio alleges that he was a mere “nominee” of the account, and that in fact, his brother Maurizio controlled the account. Thus, Giorgio shouldn’t be subject to tax on the interest and dividend income from the account.

Judge Halpern takes issue with the nominee argument. He notes that a nominee analysis doesn’t really fit here; that analysis is usually used to determine whether a transferor of property remains its beneficial owner. Here, the parties disagree on whether Maurizio used his own assets to fund account and then listed Giorgio as the nominee owner. This analysis would allow the Court to determine whether Maurizio had an income tax liability, but would only allow a negative implication as to Giorgio.

Instead, the Court focuses on whether Giorgio exercised sufficient dominion and control over the account. The Court asks whether Giorgio had freedom to use funds at his will. While Petitioner did submit affidavits from himself and Maurizio, there was no other evidence to show that Petitioner didn’t enjoy the typical rights of an account owner (i.e., the right to access funds in the account). So, it appears there’s still a genuine dispute of material fact regarding Giorgio’s ability to access these funds.  

Judge Halpern did, however, allow for the possibility that Giorgio didn’t have any knowledge of the account until after 2011. After all, one can’t withdraw funds from an account that remains secret from the nominal owner. Giorgio says that he didn’t have knowledge until September 2012.

Here’s where we enter a problem for the typical analysis of a motion for summary judgment. Petitioner provided an affidavit that he had no knowledge of the account until September 2012. Respondent denied this, but didn’t provide any other evidence showing that Giorgio did, in fact, have this knowledge. Under Rule 121(d), Respondent can’t rest on mere denials in response to a motion for summary judgment; instead, a party “must set forth specific facts showing that there is a genuine dispute for trial.”  

What’s Respondent to do? There may be no evidence demonstrably showing that Giorgio knew about the account. The only evidence is Giorgio and Maurizio’s affidavit.

Rule 121(e) provides a safety valve: if a “party’s only legally available method of contravening the facts set forth in the affidavits or declarations of the moving party is through cross-examination of such affiants or declarants . . . then such a showing may be deemed sufficient to establish that the facts set forth in such supporting affidavits or declarations are genuinely disputed.” In other words, Petitioner can’t simply provide an affidavit and rest on his laurels. Respondent must have an opportunity to cross-examine the affiant—in this case, Petitioner and his brother.

Thus, because Respondent showed under Rule 121(e) that they had no other way to refute the facts alleged in Petitioner’s affidavits, the knowledge issue is a genuinely disputed material fact for 2011. Whether petitioner controlled and could withdraw funds from the account is likewise a genuinely disputed material fact for the other tax years. As such, Judge Halpern denies Petitioner’s motion for summary judgment.

The case is now set for trial on February 10, 2020 in New York.