Arguments to Raise in Collection Due Process, Naked Assessment Concerns, and the Supremacy Clause: January 28 – February 1 Designated Orders (Part II)

In Part I we focused mostly on summary judgment motions in deficiency cases, and particularly on how important it is to frame the issue as a matter of law rather than fact. The remaining designated orders of that week provide lessons on (1) burden shifting arguments, (2) state privilege and federal rules of evidence conflicts, and (3) arguments to raise (or not raise) in collection due process (CDP) litigation. We begin our recap with the latter.

read more...

CDP Argument One: Did the IRS Engage in a Balancing Analysis? Jackson v. C.I.R., Dkt. # 3661-18L

Judicial review of a CDP hearing may sometimes seem a bit perfunctory -it can be difficult to make legal arguments in abuse of discretion review where the IRS appears to have quite a bit (though not unbounded) of discretion to take their proposed collection action. The statutes governing the usual “collection alternatives” (Offer in Compromise at IRC 7122, Installment Agreements at IRC 6159, and Currently Not Collectible at, more-or-less, IRC 6343) similarly do not provide a robust set of rules that the IRS cannot violate.

But that isn’t to say that judicial review in a CDP hearing provides no benefit. As I’ve written about before, CDP can be an excellent venue for putting the IRS records at issue -not asking the Court to rule on a collection alternative, but to prove that they followed the rules they are supposed to (proper mailing, supervisory approval, etc.). The statutory hook for these issues is the CDP statute itself -specifically, IRC 6330(c)(1) and (c)(3)(A). The orders discussed below rely (with varying success) on different statutory or common-law arguments.

In something of a rarity, all three CDP hearing cases involve parties that are either represented by counsel or, in this instance, are attorneys themselves. The lawyerly imperative to focus on the text of the statute is what drives Mr. Jackson’s argument: in this case the requirement that the IRS “balances the need for efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive than necessary.” IRC 6330(c)(2)(A)

The crux of Mr. Jackson’s argument is that the IRS didn’t balance these interests when they denied his installment request. Judge Gustafson (tantalizingly) mentions that there is a part of the Notice of Determination that specifically talks about the “balancing analysis” the merits of which the Court could review… but that, quite unfortunately, is not how Mr. Jackson frames the issue. Rather, the reference to the balancing test by Mr. Jackson is just a disguised, repackaged argument that the IRS should have accepted the proposed installment agreement.

There is good reason why it fails on that point. Namely, that Mr. Jackson was not filing compliant (he was delinquent on estimated tax payments) and the Tax Court has already held such a rejection not to be an abuse of discretion in Orum v. C.I.R. 123 T.C. 1 (2004). Since the crux of the argument is just “the IRS should accept my installment agreement” made twice (once as an issue raised under IRC 6330(c)(2)(ii) and once under IRC 6330(c)(3)(C)) it is doomed to fail.

I characterized Judge Gustafson’s mention of court review of real “balancing analysis” arguments as tantalizing because (1) I see them so rarely, and (2) they may provide new and fertile ground for court review. In my experience, a Notice of Determination always includes a boilerplate, conclusory paragraph on the “balancing analysis” conducted by Appeals. That appears to be the case here as well, where the “balancing analysis” is a statement that conveniently covers all the issues of IRC 6330(c):

“The filing of the notice of federal tax lien is sustained as there were legitimate balances due when the lien was filed and the taxes remain outstanding. All legal and procedural requirements prior to the filing of the Federal Tax Lien have been met. The decision to file the lien has been sustained. This balances the need for efficient collection of the tax with your concern that the action be no more intrusive than necessary.”

Judge Gustafson refers to this language in the notice of determination when he writes “there was at least a purported balancing, whose merits we might review.” Emphasis in original. The present facts and posture of the case before Judge Gustafson leave much to be desired, but I wouldn’t bet against other cases potentially gaining traction on that line of argument. It is true that, in my quick research, petitioners historically haven’t had much success on “balancing analysis” argument. But many of the taxpayers in such cases were either non-individuals (i.e. corporate) see Western Hills Residential Care, Inc. v. C.I.R., T.C. Memo. 2017-98, non-compliant on filing, or the determination actually demonstrated the IRS did balance the equities, see Estate of Myers v. C.I.R., T.C. Memo. 2017-11. I’d like to see a case where the taxpayer legitimately raises such equity concerns in the hearing and the IRS determination blithely repeats the boilerplate language. I believe under those circumstances you may just have an argument for remand -particularly if the administrative record gives no insight to the Appeal’s reasoning such that abuse of discretion could be properly determined.

CDP Argument Two: Invoking Res Judicata and Challenging Treasury Regulations: Ruesch v. C.I.R., Dkt. # 2177-18L

There is a lot going on in this case but, depending partly on your view of the validity of Treas. Reg. 301.6320-1(d)(2), Q&A-D1, the eventual resolution may seem inevitable. By breaking up the collection into two discrete issues (income tax vs. penalty) one can better trace the contrasting ideas of petitioner and the Court.

2010 Income Tax Liability

The taxpayer had a small balance due and was offered a CDP hearing after the IRS took their state tax refund (one of the few exceptions to a “pre-collection” CDP hearing: see IRC 6330(f)(2)). The taxpayer timely requested the CDP hearing. However, by the time the hearing actually was dealt with by Appeals it was moot because the balance (somewhere around $325 originally) now showed $0. Appeals issued a decision letter (erroneously but in this case harmlessly treating the original CDP request as an equivalent hearing) stating that there was no case because “your account has been resolved.” Nonetheless (and probably anticipating the next point), the taxpayer timely petitioned the court on that determination letter.

2010 IRC 6038(b) Penalty

A little more than a month after receiving that decision letter, the taxpayer gets a new Notice for 2010, this time saying that she had a balance of $10,000. Only it wasn’t for any income tax assessment: it was a penalty under IRC 6038(b) for failure to disclose information to the IRS. The IRS issued a CP504 Notice for this penalty which, though frustratingly similar to a CDP letter (see Keith’s article here) will not ordinarily lead to a CDP hearing. Nonetheless, the taxpayer requested a CDP hearing (as well as a Collection Appeals Request) after receiving the CP504 Notice. Still later, however, the taxpayer did receive a Notice of Federal Tax Lien for the penalty conveying CDP rights, which they also timely requested. Most important, however, is just this: at the time of the trial no determination was reached and no determination letter issued regarding the penalty as a result of a CDP hearing.

If you are treating the matter as two discrete tax issues, the answer seems straightforward: dismiss for mootness. The only tax issue properly before the court (the income tax liability, not the penalty for which no CDP hearing or determination letter has issued) has a $0 balance. From that perspective, there is no real notice of determination or collection action to review.

Having their day in court, however, the taxpayer wishes to argue otherwise. Rather than dismiss for mootness, the Court should exercise jurisdiction by granting a motion to restrain assessment or collection because: (1) the case is not moot (the IRS says the taxpayer still owes a balance (penalty) for that year, after all), (2) the IRS previously said (in the Notice of Determination for the since-paid liability) that there was no balance due for that tax year and should be held to that under res judicata, and (3) there can be no further CDP hearings on this matter because the Treasury Regulation that (seems to) allow more than one hearing for a given tax period (Treas. Reg. 301-6320-1(d)(2), Q&A-D1) is invalid.

The Court basically says “no” to each of these arguments or premises. In reverse order, the Court says (1) it doesn’t need to touch the regulation validity argument because ta prior case that explicitly allows more than one CDP hearing per period (Freije II) doesn’t rely on the Regulation; (2) res judicata is not applicable to IRS determinations that are administrative rather than judicial in nature; and (3) the case is moot because the notice of determination before the court pertains to fully paid tax. The argument the taxpayer wants to make pertains to a penalty which has not yet even had a CDP hearing (or determination).

Collectability As a Matter of Law: McCarthy v. C.I.R., Dkt. # 21940-15L

Lastly, we have the rare case where a taxpayer’s inaction (failure to fill out updated financial statements) is actually quite appropriate. In this instance, the case has been remanded to Appeals already, so court is waiting for parties to work things out. The IRS, as it often does, has since requested updated financial documents. But the taxpayer has not complied for the simple reason that it would be futile to do so: The determination of collectability, it appears, all circles around a legal question of whether a trust is the taxpayer’s nominee. Since the two parties are at loggerheads about that question, it is likely that will be a question for the Court and one of the reasons the judicial review of collection decisions can be important. Though, frustratingly for those of us working with low-income taxpayers, such wins seem to only appear to help those with trusts… See Campbell v. C.I.R., T.C. Memo. 2019-4.

Naked Assessments… In Employment Law? Drill Right Consultants, LLC v. C.I.R., Dkt. # 16986-14

There were two orders issued in the same day for the above case, and only the docket number was listed as “designated” (there was no link to a particular order) so I’m just going to treat both as designated orders, with greater detail on the more substantive of the two.

One of the orders (here) was a fairly quick denial of a summary judgment motion by the petitioner. The case concerns worker classification which, as Judge Holmes remarks, “is a famously multifactor test.” Generally, it is difficult to prevail in summary judgment on multi-factor (and highly fact intensive) tests. Here, the IRS disagrees with some of the “facts” (informal interrogatory responses) provided by petitioner in support of the motion for summary judgment. And that is all that it takes. Motion dismissed.

What is perhaps more interesting, however, is the accompanying order (here) that addresses who (petitioner or the IRS) has the burden of proof moving forward in this case. Those rules are pretty well set in deficiency cases, and the applicable Tax Court Rule 142(a)(1) also seems to make it an easy answer: the burden is on the taxpayer unless a statute or the court says otherwise.

There isn’t a direct statute on point. The most appropriate statute on point does not actually address the underlying type of tax at issue here: IRC 7491 burden shifting rules apply to income, estate and gift taxes but not employment taxes. Arguably, this could be interpreted as an intentional omission by Congress, such that there should be no burden shift with employment taxes. But, lacking a “direct hit” from Congress, might the taxpayer find some room for judge-made exceptions?

Here, the analysis goes to that most well-known of exceptions: the “naked assessment.” Judge Holmes quickly describes what appear to be two strains of naked assessment cases applicable to deficiency cases. The “pure” strain is a complete failure of the Commissioner to engage in a determination related to the taxpayer and completely ruins the validity of the Notice of Deficiency. This strain is derived from the well-known Scar v. C.I.R. case that taxpayers have rarely been able to use. The Scar strain actually won’t help petitioner, because he needs there to be jurisdiction in order to get court review of the employment status leading to the employment taxes (which are not subject to deficiency procedures).

Fortunately for petitioner, there is also a diluted strain of the naked assessment: the Portillo v. C.I.R. strain. The Portillo strain doesn’t ruin the validity of the notice of deficiency (thereby ruining jurisdiction), but simply removes the presumption of correctness. To get the Portillo outcome, you need to argue that there was a determination relating to the taxpayer, but that there was no “ligament of fact” behind that determination, and it should not be afforded a presumption of correctness. This is the judge-made exception the taxpayer wants here, and it certainly makes sense in omitted income cases (where the taxpayer has to prove a negative).

It appears that petitioner tries to get Portillo treatment by relying on a particular worker classification case, SECC Corp. v. C.I.R., 142 T.C. 225 (2014). In SECC Corp., both sides agreed that the Court didn’t have jurisdiction because the IRS didn’t issue its standard “Notice of Determination of Worker Classification” (NDWC) letter. Instead the IRS issued “Letter 4451” which both parties agreed (for different reasons) wasn’t a proper ticket to get into tax court. But the tax court found that they had jurisdiction anyway, because both parties were putting form over substance in contravention of the underlying statute’s (IRC 7436) intent. Essentially, the statute requires a determination by the IRS and the letter reflects the final determination: it doesn’t much matter what the letter is labeled and the legislative history buttressed the reading that a specific letter was not needed.

So why does the jurisdictional “substance over form” SECC Corp. case matter for petitioners here? It matters because they SECC Corp. never answered whether these “informal determinations” should be afforded the same presumption of correctness that a formal determination gets. And presumably, petitioner’s case is dealing with the same informal determination that SECC Corp. did.

Unfortunately, Judge Holmes isn’t buying that the SECC Corp. case created a new Portilla-style burden shift for worker classification issues. Petitioner has to point to something (statute or case law) that says the burden should shift. The only statute on point implies that it doesn’t. The only case(s) on point deal with notices of deficiency (SECC Corp. doesn’t speak one way or another on the issue). And so, with nothing to hang their hats on, they cannot prevail on the burden shift.

Where State and Federal Law Collide: Rules of Evidence and Supremacy: Verde Wellness Center Inc. v. C.I.R., Dkt. # 23785-17

The final designated order addresses who wins in the battle of State privilege vs. federal rules of evidence. Appropriately, it involves a medical marijuana dispensary in Arizona -once more highlighting the potential tensions of state and federal law. The IRS is trying to get more information about the dispensary via subpoena to a state department, and the state department (not the taxpayer) is saying “sorry Uncle Sam: that information is privileged.”

As far as Arizona state law goes, the department is correct on that point. Unfortunately, this is a federal tax case which, under IRC 7453 is governed by the federal rules of evidence, particularly FRE 501 which provides that federal law governs privilege questions in federal cases. And federal law in both the D.C. circuit and 9th Circuit (where the instant case would be appealable) make clear that no “dispensary – state” privilege is recognized.

Since it isn’t privileged under the rules that matter it doesn’t matter that it would be a crime under state law to disclose. That’s the gist of what the Constitution is getting at when it says “This Constitution, and the laws of the United States which shall be made in pursuance thereof; and all treaties made, or which shall be made, under the authority of the United States, shall be the supreme law of the land; and the judges in every state shall be bound thereby, anything in the Constitution or laws of any State to the contrary notwithstanding.” Art. VI, Cl. 2

Or, to parse, in conflict of state and federal law, Uncle Sam is the superior sovereign. Sorry Arizona.

 

Getting To Summary Judgment: The Art of Framing the Issue as a Matter of Law. January 28 – February 1 Designated Orders (Part One)

We welcome Professor Caleb Smith from the University of Minnesota writing today about designated orders that might also have been Tax Court opinions.  Each of the three case he discusses has a meaty order deciding the case at the summary judgment stage.  These opinions cause me to wonder what distinguishes a case when it comes to writing an opinion which will get published and one that will not.  Parties researching the issues presented here will need a significant amount of diligence to find the Court’s orders in these case.  Having gone to significant effort to reach the conclusions in these cases, it would be nice for the Court to find a way to make its thinking more transparent.  Keith

There was something of a deluge of designated orders after the shutdown, so in order to give adequate time to each (and to group them somewhat coherently) I decided to break the orders into two posts. Today is post one, which will focus on some of the interesting summary judgement orders.

At the end of January there were three orders involving summary judgment that are worth going into detail on as they bring up both interesting procedural and substantive issues. However, in keeping with the theme (and title) of this blog, focus will mostly be kept on the procedural aspects. Those interested in the underlying substantive law at issue would also do well to give the orders a close read.

read more...

Big Value, BIG Tax? H R B-Delaware, Inc. & Subsidiaries v. C.I.R., Dkt. # 28129-12

We begin with how to get summary judgment in the rarest of places: a valuation question. Judge Holmes begins the order with a note almost of incredulity on the petitioner’s motion for partial summary judgment: “The motion calls for the application of old case law to a half-century old contract, and seeks a ruling that there is no genuine dispute about a material fact — valuation of intangible assets — that is only rarely capable of decision through summary judgment.”

So, how do you get to summary judgment on a valuation issue -which by default tends to be a “material fact” at issue between the parties? Argue that the real material facts are already agreed upon such that a particular value results as a matter of law. How that works in this case is (briefly) as follows:

The “H R B” in petitioner’s caption is referring to the well-known tax preparation service H&R Block -and more specifically, the franchisees of national H&R Block. (Also for your daily dose of tax trivia, H&R Block apparently stands for/is named after Henry and Richard Bloch.) That the petitioners are franchisees of H&R Block is important because the case pretty much entirely deals with the valuation of franchise rights. At its core, the IRS is contending that the franchise rights of petitioner were worth about $28.5 million as of January 1, 2000, and the petitioner is arguing their franchise rights were worth… $0.

The valuation of the franchise rights on January 1, 2000 matters (a lot) because the petitioner converted from a C-Corp to an S-Corp effective of that date. I don’t deal with these conversions in practice (ever), but one of the lessons imprinted upon me from Corporate Tax lectures was that you can’t just jump back-and-forth without tax consequences. In particular, when you convert from subchapter C to subchapter S, you may contend with “unrecognized built-in gain (BIG)” consequences under IRC 1374(d)(1) later down the line. Essentially, you may have “BIG” tax if (1) at the time you convert from C to S you have assets with FMV in excess of your adjusted basis and then (2) you sell those assets within 10 years of conversion. Here, petitioner converted from C to S in 2000, and then sold all its assets back to H&R Block (national) in 2008 (i.e. within 10 years of conversion).

Petitioner reported BIG tax of roughly $4 million on the 2008 return, which apparently included tax on the franchise rights self-report to be worth at about $12 million. But the IRS did the favor of auditing the H&R Block franchisee, which led to a novel realization during litigation: the tax return was wrong in valuing the franchise rights at almost $12 million. It should have been $0.  In other words, petitioner may have vastly over paid their taxes.

Back to the procedural aspects. How do we get to summary judgment on this valuation issue? The IRS argues you can’t because what we are dealing with (valuation) is a contested factual determination. Essentially, this implies that wherever valuation is at issue summary judgment is de facto inappropriate.

Petitioner, on the other hand, argues that the valuation at issue here (of the franchise rights) flows as a matter of law from the undisputed facts as well as some rather old case law. Specifically, petitioner points to Akers v. C.I.R., 6 T.C. 693 (1946) and the slightly more modern Zoringer v. C.I.R., 62 T.C. 435 (1974). Petitioner argues that under these cases (1) where an intangible asset is nontransferable, and (2) terminable under circumstances beyond their control, and (3) the existing business is not being transferred to a third party, the value of the intangible asset is $0 as a matter of law. Because the undisputed facts (namely, the contract in effect at the time of the conversion) show elements one and two, and because this case does not involve the transfer of the business to another party, the value of the franchise rights must be $0.

And Judge Holmes agrees. There can be no genuine dispute about the value of the franchise rights based on the undisputed facts and controlling law. Summary judgment is therefore appropriate. A BIG win for the petitioner in what appeared to be an uphill battle.

There is, frankly, a lot more going on in this case that could be of interest to practitioners that deal with valuation issues, BIG tax, and the like. But, as someone that focuses on procedure, I want to make one parting observation on that point. Although petitioner’s counsel did a wonderful job of researching the applicable tax law, note how the pre-litigation work also plays a large role in this outcome.

As a sophisticated party with a high-dollar and complicated tax issue, there is no doubt in my mind that this case resulted only after lengthy audit (the tax at issue, after all, is from 2008 and the petition was filed at the end of 2012). One of the things that (likely) resulted from the audit was a narrowing of the issues: it wasn’t simply a disagreement about petitioner’s intangible assets broadly, it was a disagreement about the franchise rights specifically. This is critically important to the success of the summary judgment motion.

One argument the IRS raises is that the motion should fail because it isn’t clear which intangible assets are even at issue (the petition just assigns error to the valuation of the intangible assets broadly). But petitioner is able to point to the notice of deficiency and Form 886-A that resulted from the audit, and which clearly states that the dispute is about the value of the “FMV of the Franchise Rights.” In other words, the IRS only put the franchise rights as the intangible asset at issue in the notice of deficiency, so it is necessarily the only intangible asset at issue in the case (barring amended pleadings from the IRS). And, for all the reasons detailed above, the franchise rights have a value that can be determined to be $0 as a matter of law, thus allowing for summary judgment.

Consistency in Law, or Consistency in Fact?: Deluca v. C.I.R., Dkt. # 584-18

In Deluca the Court is faced with another motion for summary judgment by the petitioner, again involving fairly convoluted and fact-intensive law: tax on prohibited transactions under IRC 4975. In the end, however it isn’t IRC 4975 that plays a starring role in the order, but the statute of limitations on assessment and an ill-fated IRS argument about the “duty of consistency.”

The agreed upon facts are fairly straightforward. Petitioners established a regular IRA, and then converted it to a Roth in 2010. The Roth IRA maintained an account with “National Iron Bank” presumably in Braavos (just kidding). The Roth IRA repeatedly made loans to petitioner from 2011 – 2016. Unfortunately, loans between a Roth IRA and a “disqualified person” are a big “no-no.” See IRC 4975(c)(1)(B) and IRC 4975(e)(2). When the creator and beneficiary of an IRA engages in a prohibited transaction the IRA essentially ceases to be. See IRC 408(e)(2)(A). Since petitioner definitely engaged in prohibited transactions in 2014, the IRS issued a notice of deficiency for that tax year finding a deemed distribution from the Roth IRA of almost $200,000.

Those of you paying close attention can probably see where the issue is. The first prohibited transaction took place in 2011. An IRA is not Schroedinger’s Cat: it either is or isn’t. In this case, it ceased to be in 2011, which is when the distribution should have been taxed. Presuming there was no fraud on the part of the petitioners (and that they mailed a return by April 15, 2012), the absolute latest the IRS could hope to issue a Notice of Deficiency for that tax year would be April 15, 2018 (i.e. six years after the return was deemed filed, if it was a substantial omission of income: see IRC 6501(e). We are currently in 2019, so this spells trouble for the IRS.

But perhaps the IRS can avoid catastrophe here, in what appears (to some) to be an unfair result. The petitioners were never taxed on the prohibited transaction that took place in 2011 (they did not report it on their return), and now they are taking the position that the transaction took place then? What about consistency? Maybe the IRA is like Schrodinger’s cat after all: not really dead, but not really alive, but somewhere in-between because no one thought to look into it until 2014?

Fairness and the duty of consistency certainly seem to go hand-in-hand. The Tax Court has described the “duty of consistency” as “based on the theory that the taxpayer owes the Commissioner the duty to be consistent in the tax treatment of items and will not be permitted to benefit from the taxpayer’s own prior error or omission.” Cluck v. C.I.R., 105 T.C. 324 (1995). Generally, the elements of a taxpayer’s duty of consistency are that they (1) made a representation or reported an item for tax purposes in one year, (2) the IRS relied on that representation (or just let it be), and (3) after that statute of limitations on that year has passed, the taxpayer wants to change their earlier representation. Id. In Deluca, the IRS may argue the taxpayer (1) represented that the IRA still existed/that there was no prohibited distribution in 2011 (or any year after), (2) the IRS acquiesced in that position by leaving the earlier returns unaudited, and (3) only now that the ASED has passed does the taxpayer say there was a prohibited transaction. Seems like a reasonable argument to me.

Alas, it is not to be. Under the Golsen rule, because the case is appealable to the 2nd Circuit, that court’s law controls. The Second Circuit has held (way back in 1943, in an opinion by Judge Hand I find somewhat difficult to parse) that in deficiency cases the duty of consistency only applies to inconsistencies of fact, not inconsistent positions on questions of law. Bennet v. Helvering, 137 F.2d 537 (2nd Cir. 1943). Why does that matter? Because summary judgment is all about framing the issue as a matter of law, not fact.

Was Petitioner inconsistent on a matter of fact or a matter of law? On all of the returns (and in repaying the loans to the IRA) petitioner has appeared to have treated the IRA consistently as being in existence. Petitioner, in other words, has consistently behaved as if the “fact” was that the IRA was in existence. Because of the intricacies of IRC 408 and 4975, however, that fact was mistaken (even if treated consistently). As a matter of law the IRA ceased existing in 2011. And (apparently) petitioner is free to presently take the legal position that the IRA ceased existing in 2011 while also implicitly taking the (inconsistent) position that it did exist on that tax return.

If your head is spinning you are not alone.

However, if this appears to be an unfair result and sympathize with the IRS’s position, there is at least some concern to be aware of. Judge Thornton succinctly addresses one issue lurking behind the IRS’s position: “To adopt respondent’s position would essentially mean rewriting the statute [IRC 408(e)(2)] to postpone the consequences of prohibited transactions indefinitely into the future, depending on when the IRS might happen to discover them.” In other words, the cat would be neither alive or dead until and unless the IRS decided to take a look. The duty of consistency would almost write the assessment statute of limitations out of existence under such a reading.

Uncharted Waters of International Law: Emilio Express, Inc. Et. Al, v. C.I.R., Dkt. 14949-10

Two wins on two taxpayer motions for summary judgment: might the government go 0 for 3? As a matter of substantive law, Emilio Express, Inc. is probably the most compelling order of the three. It is also the only one where the IRS makes a cross-motion for summary judgment -and wins.

The substantive law at issue is well-beyond my expertise (I’m not in the “international-tax cloister” that Judge Holmes refers to while helpfully describing what “competent authority” means). I highly recommend that those who so cloistered, and particularly those that regularly work with Mexican tax issues, give this order a closer look. It appears to be an issue of first impression.

But, again in keeping with the procedural focus of this blog, we will focus on the cross motions for summary judgment. Again, we will look at the framing of the motions, and the facts established to understand why the petitioner’s motion for summary judgment was doomed, and the IRS’s was ultimately successful.

The consolidated cases in this order involve a C-Corporation (later converted to S-Corp.) “Emilio Express” as well as individual tax return of the sole shareholder, Emilo Torres Luque. Mr. Torres was a Mexican national and permanent resident of the United States. Mr. Torres did essentially all of his business moving cargo between Tijuana and southern California -the latter being where he appeared to live.

The gist of the issue is that the petitioner is arguing he owes no US Tax because he was (1) a resident of Mexico under the terms of the relevant US-Mexico treaty, (2) Mexico accepted his tax returns as filed for the years at issue, and (3) on their understanding of the treaty, their income should only be taxed by Mexico (in whatever amount Mexico determines) and not “double-taxed” by the US. Apart from needing to be correct on their understanding of the substantive law, for petitioner to prevail this motion for summary judgment they would have to show that there was no genuine issue of material fact.

The factual questions surrounding Petitioner’s residency matters because it is critical to how they frame the legal argument: as their argument goes if their residency is in Mexico, then the fact that Mexico accepted their tax returns means they are not subject to US income tax. The immediate problem is that determining their residency is a highly factual inquiry, with a lot of contested aspects. Everyone is in agreement that under the terms of the treaty petitioner is a “resident” of both the US and Mexico. There are additional rules under the treaty for determining “residency” where the taxpayer is, essentially, a dual-resident. Here, the petitioner needed to show that he had a “permanent home” in Mexico. Unfortunately, there was a legitimate question about exactly that matter raised by the IRS. And since that was a material fact that would need further development, petitioner’s summary judgment motion can be disposed of without even getting to whether the law would be favorable.

So how does the IRS prevail on a summary judgment motion if, as just stated above, there was a genuine issue on material fact? Because the IRS’s (winning) argument makes that fact (residency) immaterial.

As the IRS frames the issue, the residency of the petitioner (Mexico or US) is irrelevant: the law at issue really just concerns whether the individual is subject to double-taxation. In this case, the petitioner had no Mexican tax liability (the accepted returns had a $0 liability) so regardless of residency under the treaty, petitioner could be subject to US tax. The thrust of the treaty is all about double-taxation, which is the key issue here and can be resolved (based on the other agreed-upon facts) without delving into whether or not the petitioner owned a home in Tijuana. He didn’t owe Mexican tax under Mexican law. He does owe US tax under US law. Case closed.

All very interesting stuff. Again, if you work with international tax (and particularly Mexican-American tax) I recommend giving the order a closer look for the substantive issues at play.

Designated Orders: Bench Opinions and the Designated Orders Panel (12/24/18 to 12/28/18)

With the holidays and the beginning of the government shutdown, there were not many designated orders during the week of December 24 to December 28, 2018. In fact, Judge Carluzzo provided our lone orders, two bench opinions from Los Angeles to close out the year. Both of these bench opinions involve petitioners that seem to try Jedi mind tricks to convince the IRS that a letter they sent is actually different than what it appears to be.

Since it is a light week, I am also going to give an account of the designated orders panel from last month’s Low Income Taxpayer Clinic (LITC) grantee conference.

read more...

Bench Opinion 1

Docket Nos. 10878-16 and 7671-17, Luminita Roman, et al., v. C.I.R., available here.

Luminita and Gabriel Roman, the petitioners, appeared unrepresented in Tax Court and Luminita spoke on their behalf. Their argument is that the notices of deficiency issued to them were not valid and the Tax Court does not have jurisdiction in their cases. In fact, neither notice of deficiency was valid because they were not authorized by an individual with the authority to issue the notices of deficiency. In their view, each notice was generated by a computer, and computers have not been delegated authority by the Commissioner to issue notices of deficiency. The petitioners cited Internal Revenue Manual provisions as support. Judge Carluzzo states: “In that regard, we wonder if petitioners are confusing the authority to issue a notice of deficiency with the mechanical process of preparing, creating or printing one, but we doubt that we could convince petitioners to recognize that distinction.”

Judge Carluzzo goes through the analysis, noting the necessity for a valid notice of deficiency for Tax Court jurisdiction. Next, he states that the lack of a signature does not invalidate a notice of deficiency and the notices in question were issued by offices or officers of the IRS authorized to do so. Overall, the petitioners failed to meet their burden of proof that the notices of deficiency were invalid and their motions must be denied.

Takeaway: This was a bad argument to make in Tax Court. Without any proof that a notice of deficiency is invalid, an argument like this is a long shot at trying to stop the IRS. It is better to argue the deficiency or other merits of the case than to make a claim that a notice issued by the IRS is invalid because they used computers.

Bench Opinion 2

Docket No. 25370-17SL, Roy G. Weatherup & Wendy G. Weatherup v. C.I.R., available here.

The petitioners appeared unrepresented in Tax Court, though Roy Weatherup is an attorney. As background, the Weatherups made payments on a tax liability for tax year 2012. After financial hardships, they submitted an Offer in Compromise that was rejected. During the period when the offer was pending, the couple continued to make payments on the liability. Following the rejection letter, the IRS issued a notice that their 2012 liability was subject to levy. The liability amount listed in that notice was computed as though the offer had not been accepted.

The Weatherups were eligible to request a Collection Due Process (CDP) hearing and did so. In the hearing, they took the position that their liability was fully paid due to the Offer in Compromise they submitted. They state the rejection letter does not satisfy the requirements of Internal Revenue Code section 7122(f). Since their view was that the offer was not rejected within 24 months from the date of submission, the offer was deemed accepted. In their view, the IRS rejection letter was only a preliminary rejection letter.

In their view, the rejection failed to take into account their financial hardship at the time and was otherwise inequitable, leading to an abuse of discretion. Even though they were invited to do so by the settlement officer, they chose not to submit a new Offer in Compromise.   They also did not propose any other collection alternative to the proposed levy.

Judge Carluzzo finds that the rejection letter meets the requirements of IRC section 7122(f) and was issued within the requisite 24-month period. He disagreed that it was a preliminary rejection letter because it meets the specifications of a rejection letter for an offer.

Since their offer was rejected, the liability remained with the IRS. Because the petitioners did not provide an alternative during the CDP hearing, there was nothing further to review. The expectation that the settlement officer would review the Offer in Compromise was misplaced as that was not the subject of the CDP hearing.

Judge Carluzzo granted the IRS motion for summary judgment, noting that the Weatherups would still be eligible to submit a new Offer in Compromise.

Takeaway: Again, the petitioners have taken an incorrect view of IRS procedure and based their arguments in Tax Court around it. While the IRS does issue preliminary determinations in innocent spouse cases, those are clearly designated “PRELIMINARY DETERMINATION.” The IRS does not issue such notices regarding an Offer in Compromise so it is an error to expect one there. Even if the IRS had issued a preliminary rejection letter for their offer, why did the Weatherups then act as if the liability disappeared? This is another case where the petitioners needed to get their facts straight before they presented their arguments to the judge.

The Designated Orders Panel at the LITC Grantee Conference – December 4, 2018

For the LITC Grantee Conference, both Samantha Galvin and I were contacted to present on “Recent U.S. Tax Court Designated Orders.” Since that was half of the group that rotates through the blog postings on this website, we contacted Caleb Smith and Patrick Thomas to see if they would like to be included on the panel. Caleb was busy with organizing and moderating for the Low-Income Taxpayer Representation Workshop that would take place the day before the panel, but Patrick Thomas agreed to join the panel to discuss designated order statistics that he previously wrote about on this site here.

Keith Fogg introduced the panel, speaking about the nature of designated orders and the decision to start featuring designated order analysis on Procedurally Taxing since no other venues were paying attention to designated orders. Samantha and I alternated the beginning portions with Patrick finishing on the statistical analysis.

I began by introducing the designated orders group and Samantha talked about the nature of designated orders, comparing them with non-designated orders and opinions. She next spoke about the limited availability of designated orders through the Tax Court website (possibly available 12 hours on the website and then no longer searchable as a designated order) and showed the audience where the orders are available on the website.

Samantha spoke about lessons for taxpayers, saying that they should avoid being tax protesters because of potential section 6673 penalties. Also, taxpayers should respond in a timely fashion and they bear the burden of proof for deficiency and CDP cases.

I followed up on Samantha’s lessons for taxpayers. I reminded the group that the Tax Court does not have jurisdiction over petitions that are not timely filed. I talked some about nonresponsive petitioner issues as I had here. Basically, petitioners that do not know court procedure and represent themselves in court are likely doing themselves a disservice. Petitioners also need to respond to court filings, substantiate their claims and have organized documents to submit to the IRS. I used some examples from recent designated orders for actions petitioners should avoid.

Next, Samantha turned to lessons for IRS and taxpayer counsel, looking at motions for summary judgment (following Rule 121, that there must be a genuine dispute of material fact to defeat the motion, with a reminder that the motions can be denied). She reminded the audience that communication between the parties is key, and that developing a comprehensive administrative record by writing letters to Appeals with everything discussed about the case is a helpful practice. Finally, it is best to follow informal discovery procedures and to treat a motion to compel as a last resort.

I tried to give a capsule judicial history of Graev v. Commissioner and Chai v. Commissioner, touching on the IRS penalty approval process. I noted that Judge Holmes gave factors for the standard for reopening the record which are that the evidence to be added cannot be merely cumulative or impeaching, must be material to the issues involved, and would probably change the outcome of the case. Additionally, the Court should consider the importance and probative value of the evidence, the reason for the moving party’s failure to introduce the evidence earlier, and the possibility of prejudice to the non-moving party.

Two months later, Judge Halpern used different factors. He stated the factors the Court has to examine to determine whether to reopen a record are the timeliness of the motion, the character of the testimony to be offered, the effect of granting the motion, and the reasonableness of the request. The third factor, the effect of granting the motion, is the most relevant.

It was my question why there are two different sets of factors the Tax Court uses to determine whether to reopen a record in these IRS penalty approval cases.

I also provided the standard for whistleblower cases, noting that the petitioners are not very successful in succeeding at Tax Court. Internal Revenue Code section 7623 provides for whistleblower awards (awards to individuals who provide information to the IRS regarding third parties failing to comply with internal revenue laws). Section 7623(b) allows for awards that are at least 15 percent but not more than 30 percent of the proceeds collected as a result of whistleblower action (including any related actions) or from any settlement in response to that action. The whistleblower’s entitlement depends on whether there was a collection of proceeds and whether that collection was attributable (at least in part) to information provided by the whistleblower to the IRS.

Patrick then discussed the designated orders statistical analysis project. The project reviewed 525 unique orders between May 2017 and October 2018 (623 total orders, with duplicate orders in consolidated cases). During the presentation he spoke about the utility of designating orders (such as the speed to designate an order compared to publishing an opinion). From there, he looked at which judges predominantly use designated orders and the types of cases and issues conducive to designated orders. Patrick focused on a one year period (4/15/17 to 4/15/18), with 319 unique orders. For the breakdown regarding types of cases, judges and more, I recommend you go to the link above to view Patrick’s work.

Patrick had several takeaways to conclude the panel. First, a substantial number of judges (13) do not designate orders or seldom designated orders. Do those judges substantially issue more opinions? Are their workloads substantively different from those who issue more designated orders?

Second, three judges (Gustafson, Holmes and Carluzzo) accounted for nearly half of all designated orders. Why is there such a disparity between these judges and the rest of the Court?

Third, judges issued only 112 bench opinions during the research period. That was a small amount compared with the overall number of cases (2,244 cases closed in April 2018 alone). Of the 112 bench opinions, only 26 (23%) were designated. Judges might consider designating those orders so they highlight their bench opinions to the public.

Last, there is a disparity between small cases on the docket (37% of all cases) and designated orders in small tax cases (12.85% of all designated orders). Are small cases simply too routine and less deserving of highlighting to the public?

Later in the week, we found out more information from the judges themselves. There is a process when submitting a Tax Court order electronically where a judge selects that the order becomes designated. Some judges find the process more expedient than the published opinion process. One judge I spoke with did not find too much value in our study of designated orders but was glad we were able to gain from the process.

 

 

After The Shutdown: Dealing with Time Limitations, Part IV — Equity

In Part IV of the series “After the Shutdown,” Professor Bryan Camp examines the role of equity in addressing time limitations that have become tangled by the shutdown. Christine

It is unconscionable to enforce against taxpayers a statutory time limitation when Congress itself denied taxpayers the ability to protect their rights during all or part of that time period by forcing the closure of the IRS and the Tax Court.  That is, Congress failed to fund either the Tax Court or the IRS, causing both to shut down for between 31 (Tax Court) and 35 (IRS) days.  This failure caused both the agency and the Court to be closed to taxpayer’s attempts to resolve disputes about either the determination or collection of tax.  This failure is an act of Congress just as much as the statutory limitations periods are acts of Congress.  And Congress should not be able to demand that a taxpayer act within a certain time period while at the same time denying the taxpayer any ability to act during all or part of that time period.  Equity should, and I believe can, prevent that result.

The above proposition is the basis for this, my last Post in the “After the Shutdown” series.  Part I discussed how a reopened Tax Court might apply the Guralnik case to ostensibly late-filed petitions.  Part II explained the new thinking about how jurisdictional time periods differ from non-jurisdictional.  Part III explained why the time period to petition the Tax Court in §6213 should no longer be viewed as a jurisdictional limitation.  I invite those readers interested in how the new thinking would apply to the time periods in §6330(d) and §6015(e) to look at my paper posted on SSRN, which I am trying to get published in a Law Review.  Legal academics must publish or perish and, apparently, blogging does not count.

Today’s post explores why the Tax Court should be able to apply equitable principles to evaluate the timeliness of taxpayer petitions filed after the shutdown, regardless of whether any of the applicable limitations periods are jurisdictional or not.

Before diving in to equity, I wanted to point out that Congress itself could actually save a lot of litigation here by passing a very simple off-Code statute that says something like: “For purposes of computing  time limitations imposed in Title 26 on taxpayers to petition the Tax Court, the days between December 22, 2018 and January 28, 2019 shall be disregarded.”  Congress could do that.  Congress should do that (for the reasons I explain below).  But you can bet you sweet bippy that Congress won’t do that.  It made this mess.  But it is unlikely to clean it up.  So it will fall to the Tax Court to sort through cases.  When it does so, I believe the circumstances of the shutdown strongly support the extraordinary remedy of equitable tolling.

read more...

The Tax Court is truly a unique court. It is neither fish nor fowl, as Prof. Brant Hellwig so nicely explains in his article “The Constitutional Nature of the U.S. Tax Court,” 35 Va. Tax Rev. 269 (2015). That is, all efforts to type the Tax Court as part of the Legislative Branch, Judicial Branch, or Executive Branch of the federal government are flawed, both as a matter of theory and as a matter of practice. Channeling Felix Cohen and other Legal Realists, Brant sensibly concludes that we don’t really need to worry about “where” the Tax Court belongs in the Constitutional structure. It’s indeterminate position poses no threat to the structural integrity of the federal government, and its useful work in resolving taxpayer disputes with the IRS does not depend on its precise location in any branch.

But there is no doubt that the Tax Court exercises the “judicial power” of the United States. The Supreme Court said so in Freytag v. Commissioner, 501 U.S. 868 (1991). And part of that “judicial power” is the power to apply equitable principles and doctrines to the disputes that are properly brought before the Court for resolution. Prof. Leandra Lederman has a lovely article on this subject: “Equity and the Article I Court: Is the Tax Court’s. Exercise of Equitable Powers Constitutional?” 5 Fla. Tax Rev. 357 (2001).

It is important to remember that equitable doctrines are not simply free-floating grants of power. Equitable doctrines are linked to, and bounded by, a set of principles. But what distinguishes equitable principles from legal rules is that the application of equity is highly contingent on the facts before the court. The great legal historian F. W. Maitland put it this way in his 1910 Lectures On Equity: “I do not think that any one has expounded or ever will expound equity as a single, consistent system, an articulate body of law. It is a collection of appendixes between which there is no very close connection.” (p. 19) And in this 1913 law review article, Professor Wesley Newcomb Hohfeld discussed the difficulty of teaching equity as a system of rules separate from legal rules. I think it this way: equity fixes problems that legal rules cannot fix.

One equitable doctrine that might apply here is equitable tolling. When litigants show that, despite diligent efforts, some extraordinary circumstance prevented them from protecting their rights by timely filing within a period of limitations, a court will equitably toll the limitation period. See e.g. Holland v. Florida, 560 U.S. 631 (2010). The idea of “tolling” means that the limitations period is suspended for the tolling period. That is, it stops running and then starts running again when the tolling period ends, picking up where it left off. Artis v. District of Columbia, 138 S.Ct. 594 (2018).

Remember, this is equity, not a hard and fast legal rule or doctrine. So how much diligence a litigant must show varies with circumstances. Similarly, how extraordinary the barrier had to be also varies with circumstance. If the Tax Court applies that doctrine, it could decide—consistent with the logic of my very first paragraph—that the days in which Congress’s failure to fund the Court forced it to shut its doors should stop the running of any applicable limitation period. The Court may decline to apply equitable tolling, however, for two reasons.

First, the Tax Court has repeatedly said it cannot equitably toll jurisdictional time periods and it believes that the relevant time periods in the Tax Code are jurisdictional. I believe the Tax Court is simply wrong that the deficiency and CDP time periods are jurisdictional. That’s what I explained in the prior blog posts and in my SSRN paper.

Even if the time periods are jurisdictional, however, I believe there is good authority to toll them nonetheless. The authority is from the Supreme Court. In Honda v. Clark, 386 U.S. 484 (1967), 4,100 plaintiffs of Japanese descent whose assets had been seized by the U.S. during World War II sued for recovery years after the applicable limitation period had ended. The district court dismissed the cases “on the ground that the court lacked jurisdiction over the subject matter of the actions because they were not commenced within the time set forth in section 34(f) of the Trading with the Enemy Act.” 356 F.2d 351, 355 (D.C. Cir. 1966). Both the district court and the D.C. Circuit dismissed their suit for the standard reason: equitable principles did not apply to when limitation periods were a waiver of sovereign immunity. The D.C. Circuit gave the standard analysis: “All conditions of the sovereign’s consent to be sued must be complied with, and the failure to satisfy any such condition is fatal to the court’s jurisdiction.” 356 F.2d at 356.

The Supreme Court disagreed. While noting the general rule, it characterized the rule as a presumption and said that one needed to look at the particular statutory scheme at issue to discern purpose. Whether or not the time period was jurisdictional was totally absent from the Court’s approach to applying equitable tolling. The Court concluded it was “much more consistent with the overall congressional purpose to apply a traditional equitable tolling principle, aptly suited to the particular facts of this case and nowhere eschewed by Congress, to preserve petitioners’ cause of action.” 386 U.S. at 501.

The Supreme Court’s focus in Honda (and later in other cases, as I explain in my paper) was on the relationship between Congress and the limitation period. When you approach the limitation periods in §6213 and §6330(d) in that way, I believe the approach used by the Supreme Court in Honda strongly support application of equitable tolling, in two ways.

First, as I have argued here, the Tax Court itself has relied upon the great remedial purposes of §6213 and §6330 to in fact enlarge what it believes are jurisdictional time periods under certain circumstances. A careful reading of its cases shows that what animates its decisions is the remedial purpose of the statutory scheme that allows taxpayers a day in court before either (1) being forced face a tax assessment and its consequences or (2) being forced to pay an assessed tax. To count the shutdown days as part of a limitations period would run counter to that remedial purpose.

Second, I again restate the idea of my first paragraph. This is not a situation where a taxpayer would seek equitable tolling because of some individual government employee’s bad behavior. This is Congressional bad behavior. Another way to think of the relationship is this: if the time periods are part of Congress’s waiver of Sovereign Immunity, and if only Congress can waive Sovereign Immunity, then one can reasonably find that Congress itself has here waived its immunity by ceasing to fund the government.

The second reason that the Tax Court might look askance at applying equitable tolling here is that the doctrine usually applies in a fact pattern where the party seeking tolling has done all it can. Here, there may be instances where that is not true. For example, a taxpayer may not have even attempted to file a petition when the last day ran during the shutdown period. Or the taxpayer may not have even been prepared to file during the shutdown period and only prepares and files once the shutdown period ends. Most importantly, a taxpayer’s period might have been disrupted by the shutdown period but may not have ended during the shutdown period. How is the Tax Court supposed to measure a taxpayer’s diligence in that situation, when no one knew until Friday that the government would reopen on Monday?

I do not know the answer to these questions because equity is a case-by-case determination. The Tax Court can help avoid the time and effort of applying equitable tolling by applying a uniform counting rule that simply disregards the shutdown days, based on the idea underlying FRCP 6, as I will argue in an article I hope to publish in Tax Notes soon. Even there, however, there will be cases that are not covered even by a broad reading of FRCP 6. That will be the cases where the last day of the period came after the shutdown ended. Yet there may be such cases that command the sympathy of the Tax Court. I think the Court has the power to act and to apply equitable tolling in the cases where the circumstances support it.

After The Shutdown: Dealing with Time Limitations, Part III

Today Professor Bryan Camp returns for Part III of the series “After the Shutdown,” in which he examines the time limit for appealing a notice of deficiency. Now that the government has reopened, Professor Camp’s analysis may soon be tested in the Tax Court. The Tax Court’s website advises that the court will resume full operations on Monday, January 28, and that the February 25 trial sessions will proceed as scheduled. Christine

Part I discussed how a reopened Tax Court might apply the Guralnik case to ostensibly late-filed petitions.  The Tax Court is likely to apply Guralnik narrowly which means petitions not filed on the first day the Court reopens will be outside their Statutes of Limitation, putting the SOL in SOL.  Equitable tolling could help cure that problem but the Tax Court takes the position that it cannot apply equitable doctrines to the time periods for taxpayers to petition the Tax Court because, in its view, those time periods are jurisdictional restrictions on its powers.   

Part II explained the new thinking about how jurisdictional time periods differ from non-jurisdictional.  I read the opinions and drew out five indeterminate factors that the Supreme Court instructs lower courts to consider when deciding whether a particular statutory time period is jurisdictional or merely a “claims processing rule.”   

Today’s post applies the rules to the 90/150 day period in §6213.  The most reasonable conclusion under the new thinking is that §6213 is not a jurisdictional time period. That means that the Tax Court can apply equitable principles to decide whether an ostensibly late-filed petition is timely or not.  And when the Tax Court is closed for more than 33 days in a row, that is a big start to an equitable tolling analysis for those cases that cannot fit within a narrow or even a broad application of Guralnik.

read more...

Four of the five factors point to treating §6213 as a claims processing rule.  Again, this is basically a summary of what I have written in this paper posted on SSRN.  As usual, please comment on any errors or omissions that you spot. 

  1. Mandatory Language

As it currently reads, §6213(a) now contains five sentences.  The first sentence contains the limitations period, as follows: “Within 90 days, or 150 days if the notice is addressed to a person outside the United States, after the notice of deficiency authorized in section 6212 is mailed … the taxpayer may file a petition with the Tax Court for a redetermination of the deficiency.” 

Notice there is no mandatory language.  Nothing in that sentence tells the reader what happens if the taxpayer misses the 90/150 day deadline.  And nothing in that sentence gives the Tax Court the power to hear or decide matters raised in the petition. 

  1. Magic Words

The word “jurisdiction” does not appear in the first sentence.  One finds the jurisdictional grant to the Tax Court over in §6214, which provides that the Tax Court has “jurisdiction to redetermine the correct amount of the deficiency even if the amount so redetermined is greater than the amount of the deficiency…and to determine whether any additional amount, or any addition to the tax should be assessed, if claim therefor is asserted by the Secretary at or before the hearing or a rehearing.”  The §6214 power to redetermine a deficiency is simply not hooked into the §6213 timing rule.  

The fourth sentence of §6213 does contain the magic word “jurisdiction.”  But, as I explain in much greater detail in my paper on SSRN, while the word “jurisdiction” does appear in the fourth sentence, it is not there tied to the Court’s power to redetermine a deficiency.  It was added to the Tax Court much, much, later than first sentence and later than the §6214 jurisdictional language.  

  1. Statutory Context

 As I explain in my SSRN paper, Congress first gave the Tax Court jurisdiction to redetermine a proposed deficiency in 1924.  It did that in a statute separate from the 90/150 day limitation period.  The codifiers also put that jurisdictional grant in a separate section of the Tax Code, both in the 1939 Code and the 1954 Code.

Much later, in 1954, Congress added to the Tax Court’s jurisdiction the power to enjoin the IRS from assessing or collecting a tax liability when the taxpayer had filed a timely petition.  The codifiers put that injunctive power in the same statute as the 90/150 limitation period and conditioned that power on a timely petition being filed.  But the Tax Court’s jurisdiction to redetermine a deficiency is still in a separate statute.

As applied to the shutdown, that distinction possibly makes a difference.  The IRS computers will automatically set up an assessment if no IRS employee inputs the Transaction Code (TC) indicating that a petition has been filed in the Tax Court.  To account for notification delays, the computers are programmed to wait 110 days after the NOD date before setting up the assessment.  Readers should understand that assessments are made in bulk.  Each week, all the assessments that are ready to be made are aggregated into a single document that is signed, either physically or electronically, by a designated official and, hey presto, all of the taxpayers who were set up for that week are now assessed.

The problem in the shutdown is that the IRS computers keep counting the shutdown days as part of the 110 days.  So if and when the Tax Court decides that a petition ostensibly filed 140 days late is actually timely, whether under a narrow or broad reading of Guralnik or under equitable principles, the question arises as to what to do about that assessment.  The IRS should abate the assessment as §6404 authorizes when an assessment “is erroneously or illegally assessed.” 

  1. Judicial Context

 This is the only factor that supports reading §6213 as jurisdictional.  But it’s not especially strong because it consists only of lower court precedent that relies on other lower court precedent.  As I explained in Part II, the Supreme Court has not hesitated to scrub even long-standing lower court precedent when it believes the new thinking requires a different result.  The only judicial context that counts for the Supremes is their own former opinions!      

Still, there is plenty of lower court precedent holding that §6213 is jurisdictional.  First, the most recent Tax Court case to express an opinion about §6213 was—you guessed it— Guralnik.  That was in 2016.  But the Court in Gurlanik chose to look exclusively at only this factor and gave no analysis on the other four factors, saying:

In cases too numerous to mention, dating back to 1924, we have held that the statutorily-prescribed filing period in deficiency cases is jurisdictional. See, e.g., Satovsky v. Commissioner, 1 B.T.A. 22, 24 (1924); Block v. Commissioner, 2 T.C. 761, 762 (1943). Even if the “equitable tolling” argument advanced by petitioner and amicus curiae were otherwise persuasive, which it is not, we would decline to adopt that argument solely on grounds of stare decisis.

The error here is in relying on old thinking.  As I explained in Part II and also in my paper, the Supreme Court keeps emphasizing that courts should not rely solely on precedent developed under the old thinking.  In particular, my paper looks at both the cases cited by Guralnik here and not only shows how neither is particularly useful but also discovers that the Tax Court itself no longer follows Block’s rationale on how to count jurisdictional time periods!   

The most recent Circuit Court opinion of note is Tilden v. Commissioner, 846 F.3d 882 (7th Cir. 2017).  There, Judge Easterbrook gave two reasons for holding that §6213 was jurisdictional.  First, he swooned over the magic word “jurisdiction” in §6213 and totally ignored how it related, or did not relate, to the 90/150 time period.  Second, he relied on—wait for it—wait for it—Guralnik!

For many decades the Tax Court and multiple courts of appeals have deemed § 6213(a) as a whole to be a jurisdictional limit on the Tax Court’s adjudicatory competence. [String cite omitted]. We think that it would be imprudent to reject that body of precedent, which places the Tax Court and the Court of Federal Claims, two Article I tribunals, on an equal footing. So we accept Guralnik’s conclusion and treat the statutory filing deadline as a jurisdictional one.

What is especially sad here is that the string cite that I omitted from the quote does not contain a single case after 1995.  Nor could it.  There is not a single court case—much less one from the Supreme Court—that actually analyzes §6213 under the Supreme Court’s new thinking and applies all the factors.   

  1. Legislative Context

The legislative context of §6213(a) also supports reading the provision as a claims-processing rule and not as a jurisdictional requirement.  The legislative context is very similar to that which the Supreme Court found so important in Henderson v. Shinseki, 562 U.S. 428 (2011) discussed in Part II.  In brief, Congress created the original Board of Tax Appeals to give taxpayers a theretofore unavailable judicial remedy.  The legislation creating the BTA was manifestly remedial.   

The remedial nature of deficiency proceedings has been long recognized by the Supreme Court.  I think Helvering v. Taylor, 293 U.S. 507 (1935) is particularly instructive.  There, the taxpayers proved that the Notice of Deficiency contained significant error.  The government argued that taxpayers had to not just show the NOD was wrong but also had to prove up their correct tax.  The Supreme Court responded this way: “The rule for which the Commissioner here contends is not consonant with the great remedial purposes of the legislation creating the Board of Tax Appeals.”

The Tax Court itself has used the remedial nature of deficiency proceedings to soften the effect of its continued holding that §6213 is jurisdictional.  In effect, the Tax Court “cheats” on applying §6213 by choosing from among multiple starting dates to help taxpayers meet the 90 day requirement.  It does so because it recognizes the legislative context of the deadline.  I explain this in my article Equitable Principles and Jurisdictional Time Periods, Part II, 159 Tax Notes 1581 (free download here).

It would be no stretch at all for the Tax Court to apply that precedent to an analysis of whether §6213 is jurisdictional in the first place.  

Under the new thinking, then, four of the five factors point towards reading §6213 as a claims processing rule and not a jurisdictional rule.

Overpayment Jurisdiction in Partnership Cases; Orders vs. Opinions – Designated Orders: December 10 – 14, 2018

Professor Patrick Thomas from Notre Dame brings us this week’s designated order post. The first case he discusses raises and issue Professor Thomas and I first discussed a couple of years ago when he had a Tax Court case in which the petitioner expected a refund. He brought Rule 260 to my attention. I subsequently had my own clinic case with an unpaid refund. I pointed out the rule to the IRS attorney when I asked whether they objected to the motion I was preparing to file. The attorney asked that I hold off on filing the motion and I did. That decision led to a little tension with my client who wanted me to push harder but I felt that the attorney would work hard to get the refund issued based on her promise. She did. Only a small percentage of Tax Court cases result in a refund but a high percentage of those cases probably result in slow delivery of the refund. Understanding Rule 260 can be helpful.

In addition to introducing us to Rule 260, this post also questions the use of an order to dispose of a case that seems like a natural one for a decision. I cannot say why an order rather than opinion was used and hope that maybe some former Tax Court clerks who subscribe might be able to shed light on this decision in the comment section. Keith

The Tax Court picked up the pace this week. In addition to the cases detailed below, Judge Carluzzo issued a quick reminder that, under Craig v. Commissioner, a document entitled a “Decision Letter” may instead be treated as a Notice of Determination if, in fact, the facts warrant; Judge Armen disposed of a mooted motion for reconsideration; and Judge Halpern issued a cryptic order in a Whistleblower case that struck his order in the same case the prior week (which Caleb Smith covered for us previously).

read more...

Docket No. 21946-09, Greenteam Materials Recovery Facility PN v. C.I.R. (Order Here)

This case provides two important lessons. First, failing to use the Court’s formal procedures under Rule 260 for enforcement of an overpayment may result in a tongue lashing. Second, and more importantly, there is significant dispute regarding whether the Court may order refunds for partners that result from decisions in a partnership level proceeding.

The Court issued its decision in this case last year. In Judge Holmes’ view, the decision was largely favorable to Petitioners, and according to Petitioner’s counsel, resulted in a substantial refund for the partners in one tax year (along with some smaller deficiencies in others).

The Service issued computational adjustments to the partners for those deficiency years, but did not issue the refunds for the other year. Instead, the Service told the partners to sue for a refund in District Court or the Court of Federal Claims. So, Petitioner’s counsel sent a letter to the Tax Court, asking the Court to force the Service to issue the refund.

I’ve certainly been in a similar situation before. The Court issued a decision for my client, found an overpayment, and ordered a refund. Months came and went. Still no refund. Fortunately, the Tax Court Rules provide for a remedy: specifically, Tax Court Rule 260. In ordinary deficiency cases, the Court may order Respondent to issue a refund under Rule 260. Presumably, the Court could use its contempt power under section 7456(c) if the Service continued to refuse.

Rule 260 has a few hoops to jump through. First, under Rule 260(a)(2), Petitioner may not commence a Rule 260 proceeding until 120 days have lapsed since the decision became final under section 7481(a), which for non-appealed cases means 90 days after the decision is entered. So at least 210 days from the decision must elapse before starting down this path. The Court issued its decision in Greenteam on June 21, 2017, so Petitioner would successfully jump through this hoop.

However, Petitioners may not simply ask for the Court to step in without providing Respondent an opportunity to correct its mistake. Rule 260(b) specifies the content of the motion, which requires “a copy of the petitioner’s written demand on the Commissioner to refund the overpayment determined by the Court . . . [which] shall have been made not less than 60 days before the filing of the motion under this Rule . . . .” The demand also must be made to the last counsel of record for the Commissioner—not on any other Service employee.

I’m not sure whether Petitioner’s counsel made this demand, but it seems as if it at least wasn’t attached to the letter sent to the Tax Court.

Judge Holmes orders that the letter be treated as a motion under Rule 260, but subsequently denies that motion as being premature (presumably because no demand has been shown as made on Respondent).

Regardless, Judge Holmes does pontificate over whether the Court has any refund jurisdiction in the first instance. After all, no overpayment determination was made in the partnership level case; in TEFRA cases all overpayment issues are necessarily made at the partner level. According to Judge Holmes, section 6512(a)(4) “states [that the Tax Court’s] ordinary overpayment jurisdiction does not apply.”

I quibble somewhat with that statement; 6512(a) provides that a Petitioner may not obtain a refund using other mechanisms (e.g., a refund claim or suit); subsection (a)(4) provides an exception to this rule for partner level refund determinations. Rather, section 6512(b) provides the Tax Court with jurisdiction to determine overpayments, which presumes that the Tax Court has determined whether a deficiency exists and can therefore determine whether an overpayment exists. It can’t do so directly in partnership cases, and so the argument goes, the Tax Court doesn’t have refund jurisdiction as to related partners in such cases.

Still, section 6230(d)(5) provides, that “in the case of any overpayment by a partner which is attributable to a partnership item (or an affected item) and which may be refunded through this subchapter, to the extent practicable credit or refund of such overpayment shall be allowed or made without any requirement that the partner file a claim therefor.” Judge Holmes notes that secondary sources are unclear on whether, read together, these sections grant the Court overpayment jurisdiction in such a case.

Judge Holmes seems willing to consider the issue, but Petitioner must first renew its request under Rule 260. First step: issue a demand letter to Respondent’s counsel under Rule 260. Or, as the Service suggested, take up the issue in District Court or the Court of Federal Claims (where the jurisdictional issue is much less murky).

Docket No. 6699-18S, Banini v. C.I.R. (Order Here)

This order from Judge Leyden highlights my concern with the Court’s use of Designated Orders to fully dispose of cases. The facts of the case are also interesting, and a reminder to law students that they most likely cannot deduct their ever-increasing tuition payments.

Petitioner was a “Patent Technical Advisor” at a large law firm, and took advantage of the firm’s offer of non-interest-bearing loans to attend law school. Mr. Banini deducted his law school tuition payments on his federal income tax return for 2013 and 2014, and eventually graduated with a J.D. in January 2015.

Education expenses are deductible as business expenses under section 162 if the education “maintains or improves skills required by the taxpayer in his employment … or meets the express requirements of the taxpayer’s employer, or of other applicable law or regulations, imposed as a condition to the retention of the taxpayer of an established employment relationship….” 26 C.F.R. § 1.162-5(a). However, such expenses are still nondeductible if the education qualifies the taxpayer for a new trade or business. Id. § 1.162-5(b). So, even if the education “maintains or improves skills required by the taxpayer in his employment” (as a legal education certainly may when working as a patent agent in a large law firm), the expenses are nondeductible if the education qualifies the taxpayer for a new trade or business.

In the years that Petitioner deducted his education expenses, he was a Patent Technical Advisory—not an attorney. Therefore, Judge Leyden finds that the educational expenses qualified him for a new trade or business, even though the expenses could conceivably maintain or improve his skills within the scope of his current employment relationship with the law firm. Substantively, all is well and good with this order. The legal issue is straightforward.

But why dispose of this case via order at all, and not include it in the Tax Court Summary Opinion reporter? Off the cuff, reasons to not include an order in a reporter could include (1) a non-substantive order (such as an order setting a date for trial or for payment of a filing fee), (2) a concern regarding the order’s precedential effect (i.e., orders are, under Tax Court Rule 50(f), nonprecedential), and (3) relatedly, an efficiency concern regarding the opinion’s issuance procedures through the Chief Judge, which judges have previously noted as a reason to issue orders (and to designate them).

This order fully disposes of a substantive legal issue in this case. There is no precedential concern, because this is a Small Case; under section 7463(b), such cases carry no precedential value. That leaves us with an efficiency concern, i.e., that it may take more time to issue the opinion via the Court’s formal procedures, and that an order may more quickly disposes of the substantive issue.

The Court and individual judges must balance this efficiency concern with the public’s interest in obtaining information on the substantive legal issues. The order in Banini will not appear in searches on Westlaw, Lexis, or any other service. It appeared as a “Designated Order”, but only readers of this blog and individuals who checked the Tax Court’s website on December 13, 2018 would know this. (Searches on Westlaw and Lexis that I conducted returned no results regarding this case). Individuals searching for section 162 issues involving educational expenses and patent agents will likewise not find this case, unless they know to search the Court’s docket. A search of Westlaw and Lexis likewise revealed nothing more than a few old cases involving this fact pattern.

I understand the efficiency rationale behind issuing this decision as an order. Perhaps there is some other advantage of which I’m unaware. Nevertheless, I believe this strikes the wrong balance and obscures otherwise helpful information from the public. Understanding this concern, the Tax Court might consider permitting judges to issue opinions independently in a nonprecedential small case. This would better address the efficiency concern, while allowing the public and practitioners greater access to these decisions. This may raise a separate consistency concern among the Court, but this is somewhat mitigated because the opinions are nonprecedential.

Odds & Ends:

Docket No. 6086-18L, Banahene v. C.I.R. (Order Here)

Judge Armen denied Respondent’s motion for summary judgment in this CDP case involving return preparer penalties. At issue is both 1) whether Respondent compiled with 26 C.F.R. § 1.6994-4(a)(1), (2) and 2) whether that regulation is mandatory or directory. That regulation seems to require that the Service “send a report of the examination to the tax return preparer” before assessing any penalties under section 6694. Section 2 of the regulation requires that the Service issue a 30-day letter to the preparer with administrative appeal rights, unless the statute of limitations on assessment under section 6696 will shortly run.

While Respondent desired summary judgment based upon the second issue—i.e., that the Service should, but need not comply with the regulations for the penalty assessments to be valid—Judge Armen did not wish to spend the Court’s limited resources to address this issue of first impression. Rather, if the Service actually had complied with the regulation, that novel issue would be mooted and the assessments upheld. Likewise, other issues raised in Respondent’s motion would be mooted if the assessments were invalid. Therefore, Judge Armen denied the motion.

Docket No. 21940-15L, McCarthy v. C.I.R. (Order Here)

Judge Halpern likewise denied Respondent’s motion for summary judgment in this CDP case, apparently because neither Petitioner nor Respondent addressed a dispositive issue in the case: whether Petitioner’s failure to provided updated financial information to IRS Appeals could serve as an independent basis to uphold the Service’s Notice of Determination. Instead, the parties focused on the correctness of Appeals’ decision to treat assets in Petitioner’s trust as those held by Petitioner’s nominee. Judge Halpern allows that, if failure to submit the financials would’ve been futile (i.e., Appeals had chosen to stick to its position to deny any requested collection alternative because of the trust issue), such failure might not support affirming Appeals’ decision. But because these issues are not in the record or otherwise briefed, Judge Halpern orders Petitioner to explain this failure in more detail.

Docket No. 23444-14, Palmolive Building Investors, LLC v. C.I.R. (Order Here)

Finally, Judge Gustafson denies summary judgment to Petitioner in this conservation easement case. Petitioner had requested summary judgment, asking the Court to find that Petitioner qualified for a reasonable cause exception to penalties, which were at issue due to the Court’s prior opinion upholding Respondent’s deficiency assessment.

Judge Gustafson denies summary judgment rather … summarily. However, he goes on to offers some comments, designed to help the parties prepare for trial—and of general interest to practitioners. He notes that some of the arguments raised as to reasonable cause depend upon legal issues decided as a matter of first impression and upon which the Tax Court and a Court of Appeals had disagreed. These factors generally auger in favor of a reasonable cause finding, because of the uncertainty regarding a party’s position on the issue. He notes, however, that a reasonable cause finding requires examination of all of the facts and circumstances, of which the legal issue’s novelty and the circuit split are but two. Because other facts and circumstances are materially disputed, summary judgment is not the appropriate vehicle to address these issues.

 

After The Shutdown:  Dealing with Time Limitations, Part I

Professor Bryan Camp offers the first of a series of posts discussing the shutdown and its impact on taxpayers receiving IRS stat notices and notices of determinations. This is a particularly timely post as we heard at the ABA Tax Section meeting that IRS and Tax Court staff and practitioners are meeting today to discuss the shutdown. Bryan offers some suggestions to minimize the impact of the shutdown on taxpayers with Tax Court filing deadlines. Les

The Tax Court officially closed its doors on December 28, 2018.  During one of the panels at the ABA Tax Section Pro Bono and Tax Clinics Committee meeting this past weekend in New Orleans, the question arose of how the shutdown affected the various administrative and judicial time periods for taxpayers to take various actions.  For example, if the 90 day period in § 6213 for filing a petition expired during the shutdown, would the taxpayer still be able to file a timely petition on the day the Tax Court reopens?

Like Winter, litigation is coming.  The point of this series of posts is to help readers prepare.

The Tax Court may actually have already given us one answer to the question of how the shutdown affects various time periods.  In Guralnik v. Commissioner, 146 T.C. 230 (2016), the Court held that a day the Tax Court was physically closed would not count as part of the §6330(d) time period to protest a CDP Notice of Determination.

Keith Fogg and I have slightly different takes on how Guralnik might apply and he kindly invited me to post my thoughts on the matter.  Today’s post will explain why I believe that Guralnik is strong support for the proposition that none of the shutdown days are days that count for jurisdictional time periods.

In future posts I will explain how taxpayers and the Tax Court might actually make some lemonade from this lemon of a shutdown.  The Tax Court currently holds that the following time periods are jurisdictional: the 90/150 day period in §6213; the 30 day period in §6330(d); and the 90 day period in §6015(e).  That means that the IRS Office of Chief Counsel cannot simply stipulate away the problem.  The looming litigation gives the Tax Court a wonderful opportunity to revisit its thinking about the jurisdictional nature of these statutes.  So in the next series of posts I will summarize a paper I posted on SSRN that explains: (1) the current Supreme Court doctrine for evaluating whether a statutory time period is truly a limitation on a court’s subject matter jurisdiction; and (2) how that doctrine applies to the time periods in §6213, §6330 and §6015(f).

read more...

Facts and Holding in Guralnik

In Guralnik, the taxpayer (TP) was trying to file a collection due process (CDP) petition.  On the day before the 30thday, the TP sent his petition using Fed Ex “First Overnight” service.  Fed Ex was unable to physically deliver the petition the next day (the last day of the 30 days) because the Tax Court was officially closed that day due to a snowstorm. Fed Ex successfully delivered the petition the next day, one day late.  The question was whether the petition was timely.

The TP first asked for equitable tolling.  Keith Fogg and Carl Smith filed an amicus brief in the case, arguing the Court could do that because the 30 day period was not jurisdictional.  The Tax Court rejected the argument because, it said, §6330(d) made the timely filing of the CDP petition part of the jurisdictional grant. The Tax Court reasoned that while it could apply equitable tolling to what it called “claim-processing rules” it could “not apply equitable tolling to a jurisdictional filing requirement.”

The TP next argued for the §7502 statutory mailbox rule.  The Tax Court rejected that argument because the particular Fed Ex service used (“First Overnight”) was not listed as an approved private delivery service.  If the TP had just used “Standard Overnight” that would have been fine.  But the “First Overnight” was a new service and the IRS had not updated the list of approved private delivery services to include it. And you wonder why people hate lawyers.

The TP next argued that the snow day was a “legal holiday” within the meaning of §7503.  The Tax Court said “nope.”

But the Tax Court then latched onto a really nifty idea.  It decided that Tax Court Rule 1(b) allowed it to adopt the rules for counting days contained in Federal Rules of Civil Procedure (FRCP) 6.  Included in FRCP 6 is a rule for dealing with days when a court is inaccessible.  FRCP 6(a)(3)(A) says that

 Unless the court orders otherwise, if the clerk’s office is inaccessible…on the last day for filing…then the time for filing is extended to the first accessible day that is not a Saturday, Sunday, or legal holiday.

The Tax Court happily reasoned that

procedural rules for computing time are fully applicable where the time period in question embodies a jurisdictional requirement. Rather than expanding a court’s jurisdiction, Civil Rule 6 simply supplies the tools for counting days to determine the precise due date. (Internal quotes and cites omitted).

The Tax Court then applied FRCP 6(a)(3) to the facts of the case and did not count the snow day as part of the 30 day time period set out in §6330(d).  Wrote Judge Lauber:

We conclude that Civil Rule 6(a)(3) is “suitably adaptable” to specify the principle for computing time when our Clerk’s Office is inaccessible because of inclement weather, government closings, or other reasons. Civil Rule 6(a)(3) provides that the time for filing is then “extended to the first accessible day that is not a Saturday, Sunday, or legal holiday.” Because the petition was filed on February 18, 2015, the first accessible day after the Court reopened for business, the petition was timely filed and we have jurisdiction to hear this case.

Application of Guralnik to Shutdown Cases:  The Good, the Bad, and the Different.

One could read Guralnik as a supersized mailbox rule.  It would apply to taxpayers faced with a time period that expired during the shutdown.  Such taxpayers could still successfully file a timely petition so long as they did so on “the first accessible day after the Court reopen[s] for business.” I think this is how Keith and most folks read the case and I admit it’s the most solid reading.  Let’s call it the narrow reading.

The Good

The narrow reading of Guralnik has the advantage of letting the Court avoid messy equitable inquiries.  It’s a bright-line counting rule and could really help process a bunch of cases into the system and get them to a quicker resolution on the merits.  That’s good.  And it will probably give relief to a large number of taxpayers who are actually able to quick-like-a-bunny file on the day the Tax Court reopens.  It will also give relief to taxpayers who have attempted to file but whose petitions were undeliverable because of the shutdown and are being held for re-delivery by their chosen delivery service.  That’s also good.

The Bad

The first downside of the narrow reading is that it would only help those taxpayers whose deadline hit during the shutdown.  While that is likely the largest group of affected taxpayers, there may be some who received their Ticket to the Tax Court (be it a Notice of Determination or Notice of Deficiency or other ticket) at some point during the shutdown but at a time where their deadline comes after the shutdown ends.

For example, let’s say a taxpayer received an NOD 40 days ago, when the shutdown had not begun.  There are still 30 days left to petition the Tax Court, but the shutdown has prevented the taxpayer from dealing with the NOD, either by filing a petition or by going to Appeals.  Or perhaps a taxpayer receives an AUR NOD during the shutdown.  I have heard of taxpayers still receiving automated notices of intent to levy during the shutdown (and having no one to call), but I welcome comments on whether some IRS automated processes are still spitting out NODs.

For these types of taxpayers, the narrow reading of Guralnik means they must ignore the shutdown and plan on the Tax Court reopening in time for them to make a timely filing without having the usual opportunity to resolve the matter with Appeals or other IRS office.

The second downside to the narrow reading is that it requires taxpayers to assiduously monitor the shutdown situation and the Tax Court’s status.  They cannot plan.  They, or their representative must carefully monitor the Tax Court’s status because the shutdown has essentially reduced their limitations period to one day.  Especially if the Tax Court reopens with no warning, very few taxpayers would be able to meet the  “the first accessible day after the Court reopen[s] for business.”  So the cautious use of Guralnik would help only those taxpayers who filed their petition on the FIRST day the Court reopens (hereinafter “the Magic Day”).

One way the Court could ameliorate this second downside is to delay its reopening after the Shutdown Ends.  For example, the Court could post an order that says it will remain closed for the first 10 business days after the President signs an appropriation bill funding the Court.  That would not only allow taxpayers time to get their acts (and petitions) together to file on the Magic Day, it will also allow Tax Court personnel to clear the decks of accumulated work, re-calendar cases, and prepare for the Magic Day snowstorm of filings.  This idea was floated at the ABA Tax Section Meeting last week.  I think Keith came up with it, but cannot recall for sure.

A Different Understanding of Guralnik?

The narrow reading of Guralnik limits its application to only those situations where the last day of the applicable deadline falls on an inaccessible day.  But the Court could also apply Guralnik more broadly, in a way that would ameliorate both downsides.  I take this idea from Judge Lauber’s reasoning: “Rather than expanding a court’s jurisdiction, Civil Rule 6 simply supplies the tools for counting days to determine the precise due date.”  The idea here is to read FRCP 6 as a tolling provision and not just as a bulked-up mailbox rule.

Judge Lauber’s reasoning recognizes the underlying concern of FRCP 6’s counting rule:  unpredictable events should not count against limitation periods.  The idea of unpredictability was central to the D.C. Circuit’s opinion in In re Swine Flu Immunization Prod. Liab. Litig., 880 F.2d 1439 (D.C. Cir. 1989), a case the Tax Court relied on in Guralnik.  The Swine Flu court used Civil Rule 6(a) “as a guide to interpreting the `jurisdictional’ statute establishing the time for filing with the agency,”  (emphasis supplied). The court there  applied the idea of FRCP 6 to an administrative deadline, excluding both the final Sunday and the following day when government offices were closed on account of a snowstorm.  Notice that, by its plain language, FRCP 6 deals only with counting dates relating to court filings.  But the idea of unpredictability is larger than the words.  Put another way, the words of FRCP 6 embody an idea.  The idea of unpredictability.  The D.C. court explained: “we find it inconceivable that Congress would have wished to bar plaintiffs who fail to anticipate on Friday that the Government will decide to close a filing office the following Monday due to a snowstorm.”

Both Judge Lauber’s reasoning and the D.C. Circuit’s reasoning allow for a more generous reading of Guralnik.   If the principle underlying FRCP 6(a)(3) is truly that we do not count inaccessible days that arise because of unpredictable or extraordinary circumstances—whether they be snowstorms or shutdowns—then such days should not count, period.  No logic limits the counting rule to only the situations where the last day of the deadline falls on an inaccessible day.

This broader reading of Guralnik would not be decision that forces the Court to apply equitable principles to each case.  It would be a decision simply about whether the days when the Court is inaccessible were predictable or not.  Saturdays and Sundays and federal holidays are predictable.  They are on the calendar.  But snowstorms and shutdowns are not predictable.  So those days should not “count” for limitation periods.

One obvious barrier to this broader reading of Guralnik is that the text of FRCP 6 talks only about situations where the last day falls on an inaccessible day.  But, again, just as the D.C. Circuit applied FRCP 6 to a situation that was not covered by its plain language, so can the Tax Court here apply the idea of FRCP 6—the purpose of FRCP 6—to the shutdown situation.  Again, in the words of the D.C. Circuit: “Statutory provisions laying down time periods for taking appeals, like any other enactments, must be interpreted and applied by courts; in so doing, we use the federal rules as guides. Surely, the jurisdiction of the federal courts to construe the jurisdictional provisions of a statute cannot be a matter of serious dispute.” (citations and internal quotes omitted).

The insight of the D.C. Circuit, adopted by the Tax Court in Guralnik is that taxpayers should not be held accountable for situations which they cannot neither predict or control.  The unpredictability of the shutdown mirrors the unpredictability of snowstorms.  Nay, it magnifies that unpredictability.  No one can predict precisely when the shutdown will end.  This inability makes it impossible for taxpayers and their representatives to plan their filings.  They simply cannot determine the precise due date.  Every day the shutdown continues is another day that some deadlines have run and is another penultimate day for other deadlines.  Will the shutdown continue the next day?  Will the shutdown continue for three more days?  Who the heck knows!  Similarly, taxpayers subject to a 90 day deadline who received their Tax Court ticket before the shutdown will have unexpectedly lost all the days of the shutdown to resolve their case in the Office of Appeals.

Remember, the FRCP is just a standardized rule of procedure, promulgated by the Supreme Court.  The courts can, and do, regularly interpret the FRCPs using a common law case-by-case approach.  Recent opinions on the meaning and application of FRCP 8(a)(2) are good examples.  So if the D.C. Circuit can apply FRCP 6 to an agency deadline by using the idea that it was “inconceivable” that Congress intended the limitation period to include inaccessible days, the Tax Court can do the same here and for the same reason: it is inconceivable that Congress intended the 30 and 90 day periods within which to petition the Tax Court for relief to be swallowed up by a government shutdown that is now over 30 days in length.  Those shutdown days simply should not count towards the applicable limitation period.

An alternative approach to applying this broader reading of Guralnik to the shutdown situation would also treat FRCP 6 more as a tolling provision, but in a more limited way than allowing any and all inaccessible days to not count towards the applicable limitation period.  Again, keep in mind we are not talking about equitable tolling.  The question is about finding an administrable bright-line counting rule to deal with the cases filed after the shutdown ends, both those cases filed on the Magic Day, and those cases that miss the Magic Day but are still filed timely….if you don’t count the shutdown days.

The alternative approach would recognize that a single inaccessible day in the middle of a 90 day period or 2 year period would be little more than a Saturday or Sunday or holiday in terms of impact.  It would not interfere with planning nor with the ability of the taxpayer to determine the precise due date for the Tax Court petition the way that this interminable shutdown does.  But when, as here, the inaccessible days keep piling up and their end point is unknowable, the FRCP 6(a)(3) could be applied to acknowledge that difference.  One bright line interpretation would stop counting inaccessible days when they reach some percentage of the applicable limitations period, perhaps over a third.  Another bright line would be to say inaccessible days do not count when they are in excess of four in a row (longer than any three day weekend).

Next Posts

The Court could also take an equitable tolling approach by apply FRCP 6 to the Magic Day filings but then evaluating all other filings on a case by case basis.  That would require the Court to depart from its long-standing view that sections 6213, 6330(d) and 6015(e) are jurisdictional statutes.  I think there is a very good case to be made why the first two are not jurisdictional and a very weak case for the third.  That is the subject of future posts in this series.

The Tax Court’s Tenacious Stance on 280E: Designated Orders 12/17/2018 – 12/21/2018

Professor Samantha Galvin from University of Denver’s Sturm School of Law brings us this week’s designated orders. The first case demonstrates the tax difficulties facing marijuana dispensaries under the current state of the law. The last one continues Judge Gustafson’s lessons to Chief Counsel attorneys regarding summary judgment motions. In between the court provides another lesson to Chief Counsel attorneys regarding the application of the fraud penalty. Designated orders have come to a halt because of the shutdown. We will restart this series when the Tax Court reopens. In the meantime we are getting some guest posts from the designated order team on other topics. Keith

The Tax Court issued seven orders during the week of December 17, 2018 right before the holidays and the government shut down. The orders not discussed involve: a CDP summary judgment after no documents from petitioner here; whistleblower housekeeping here; a CDP summary judgment after incomplete information from petitioners here; and a penalty issue in a partnership case here.

Below, I discuss a designated order in a medical marijuana case, and in the spirit of the holidays, two orders that reflect the different lengths the Tax Court will take to protect taxpayers.

read more...

Docket No. 23020-17, Superior Organics v. CIR (here)

Marijuana businesses are not often the subject of designated orders and it may be because the Tax Court has firmly held its stance on the application of section 280E, but that hasn’t stopped petitioners from trying to get around it. For those who don’t know, section 280E disallows deductions (beyond the cost of goods sold) incurred in the business of trafficking controlled substances. Marijuana is a controlled substance under the section because it is still classified as a Schedule I drug, despite 33 states and D.C. legalizing it in some form.

Petitioner is an Arizona medical marijuana dispensary and has made fifth amendment related arguments before the Court. I’ve heard them before and so has the Court, and it’s not even the first time the Court has heard it from the tax lawyer representing petitioner when the order was issued (interestingly, petitioner retained new counsel nineteen days after this order was issued). A footnote in the order points out that petitioner’s representative has used the same argument in other cases.

In this designated order the Court is specifically addressing petitioner’s motion in limine and motion for judgment on the pleadings. The motion is liminine requests that the Court find that the burden of proof in applying section 280E is on the IRS and the motion for judgment on the pleadings argues that section 280E is unconstitutional.

At the risk of oversimplifying it, petitioner’s basis for invoking the fifth amendment involves two arguments. First, a taxpayer should not be required to incriminate himself by producing information about income and expenses when the information may establish that the taxpayer was involved in drug trafficking. Second, requiring a taxpayer to disprove they are involved in criminal enterprise is a violation of due process, under Speiser v. Randall, 357 U.S. 513 (1958). The Court says petitioner has mischaracterized Speiser because it dealt with constitutionally protected free speech rights and there is no constitutional protection for drug trafficking.

Typically, and in this case, the Court holds that the taxpayer cannot avoid the burden of proof by invoking the fifth amendment. The 10th Circuit has also held that the IRS’s determination that a taxpayer trafficked in controlled substances for purposes of applying section 280E is not the same as a criminal violation determination under the Controlled Substances Act. (See Alpenglow Botanicals, LLC v. United States, 894 F.3d 1187 (10th Cir. 2018)).

Petitioner has filed previous motions for protective order in this case in an attempt to avoid producing what petitioner calls “incriminating evidence,” and what the Court calls “income and expense substantiation.”

Petitioner cites two burden shifting provision in support of its argument. First, section 7454, which shifts the burden to the IRS on the issue of whether a taxpayer has been guilty of fraud with intent to evade tax. Second, section 162(c), which shifts the burden of proof to the IRS for certain illegal payments.

The Court finds that neither section applies, but the existence of those sections demonstrates that Congress knows how to shift the burden in certain situations and has chosen not to do so here. The Court denies both of petitioner’s motions.

Docket No. 16273-17, Roger H. Durand, II, v. CIR (here)

In a win for petitioner and lesson for respondent, the Court highlights the difference between a section 6663 penalty and a section 6651(f) penalty in this designated order.

This case was already tried in October of 2018 and the parties are in the process of preparing post-trial briefs. The Court addresses IRS’s motion to leave to amend its answer to conform to proof. Petitioner objects.

Petitioner is a reverend who did not timely file for several years beginning in 2006, but eventually filed all years in 2014 and 2015. The IRS issued a notice of deficiency which included a 75% fraud penalty for each tax year under section 6663. Petitioner petitioned the Court, and respondent answered detailing the allegations of fraud and praying that the 6663 penalties be approved.

Neither the deficiency notice nor respondent’s answer referenced the section 6651(f), the “fraudulent failure to file” penalty, but now the IRS wants to amend its answer to include the section 6651(f) penalty – after the trial has taken place and the case has been submitted.

Petitioner argues that different timeframes govern the analysis of whether the penalties should apply and respondent tries to minimize this argument, but the Court sides with petitioner. The Court implies that respondent may not understand the difference between a 6663 and 6651(f) penalty and cites its analysis Mohamed v. Commissioner, T.C. Memo. 2013-255, on this issue.

Section 6663 authorizes a penalty for filing a fraudulent return, and section 6651(f) authorizes a penalty for fraudulently failing to file a return.

Section 6663 can only be imposed if a return is filed, and on that return the taxpayer fraudulently misrepresents the amount of tax due. Under section 6663 the fraud occurs when a return is actually filed, not when it is due.

Section 6651(f) is imposed when a taxpayer deliberately fails to file a return to conceal the existence of income in order to evade tax. Under Section 6651(f) the fraud occurs when a return is due, not when it is actually filed.

The taxpayer’s intent at the appropriate times (date return was due and date of actual filing) is critical to determining if each penalty should be imposed. Because the trial has concluded and the IRS failed to include a section 6651(f) penalty, the reverend never had the opportunity to present facts about his intent at the time the returns were due, which is when the 6651(f) fraud would have occurred, so the Court denies respondent’s motion.

 

 

Docket No. 10936-18, Judith Lee Alston v. CIR (here)

I like highlighting when a judge goes above and beyond to help a pro se taxpayer understand the Tax Court process, because there are many other times when the Court issues a boilerplate order that seemingly lacks any attempt to ensure the taxpayer will understand it. One of the Tax Court’s strengths is the sensitivity that it demonstrates to pro se taxpayers. Perhaps the holiday season was the reason for Judge Gustafson’s extra care, but it is worth noting and commending.

In this designated order, the IRS has moved for summary judgment and the Court denies it. In doing so, the Court explains the necessity of summary judgment to judicial efficiency but also acknowledges that it can be unfair to pro se taxpayers who don’t understand what it means and don’t understand their obligation to respond. In most cases, this unfairness is remedied when the Court issues an order explaining the summary judgment process and ordering the pro se petitioner to respond to the facts and legal arguments in respondent’s motion. Judge Gustafson admits that the usual remedy is not always perfect.

Judge Gustafson gives the IRS some credit for filing the motion well in advance, the motion’s general layout, and for complying with rule 121(b) by supporting factual assertions with declarations and exhibits. But then comes the criticism, the Judge thinks respondent’s 89 paragraph motion would be very difficult for a non-lawyer to understand, because it blends factual assertions with factual rebuttal of anticipated possible counter assertions, and legal argument. He goes on and dissects specific issues with respondent’s motion and provides stern guidance on what the motion should contain and how it should be organized.

In conclusion, he states, “[I]t is not the Court’s responsibility or role to instruct counsel how to prepare filings. But we do have the responsibility of assuring a process that is understandable and fair to the self-represented petitioner. We do not know how to assure such fairness in an order directing petitioner to respond to the instant motion.”

It is likely that the IRS will redraft and refile its summary judgment motion, but the taxpayer received the gift of a little more time from the Tax Court.