A Light Week at the Court Shines the Light on Pro Se Taxpayers Designated Orders: 11/12 – 11/17/2018

We welcome Professor Patrick Thomas from Notre Dame who brings us this week’s designated orders. Keith 

The Tax Court designated three orders this week—another very light week for the Court. Judges Thornton, Gustafson, and Leyden handled some common pro se taxpayer issues. Judge Gustafson, with a very detailed chronology of a petitioner’s unresponsiveness, ordered dismissal of a pro se taxpayer’s case. The cases from Judge Thornton and Judge Leyden are discussed in more detail below. 

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Docket No. 21411-17L, Dail v. C.I.R. (Order Here)

Judge Thornton grants Respondent’s motion for summary judgment nearly in full. This CDP case with a tax protestor flavor arose from returns that Mr. Dail filed for 2010, 2011, and 2012.

In April 2015, Mr. Dail filed amended returns for each year, in addition to 2009 and 2013. These amended returns reported $0 of taxable income, notwithstanding wages reported on a W2. He also attached to the returns a Form 4852 (a substitute for a Form W2 or 1099), which also reported $0 of wages. The Forms 4582 claimed that the wages are not taxable under sections 3401 and 3121 (which define “wages” for federal income and FICA tax withholding purposes, respectively). Mr. Dail also attached various documents that purported to exempt his wages from taxation, arguing that he was a “private sector citizen (non-federal employee) employed by a private sector company (non-federal employer).”

The Service did not take kindly to these amended returns. It rejected the returns and assessed frivolous return filing penalties under section 6702 of $5,000 per return. An original return filed for 2014 also earned Mr. Dail a $5,000 penalty under section 6702, along with a Notice of Deficiency for the underreported tax and an accuracy penalty under section 6662(a).

 

Subsequently, Mr. Dail received a Notice of Federal Tax Lien and Notices of Intent to Levy for each year in February 2017 and timely field a CDP hearing request—noting again that he’s not liable for any taxes of any sort, and that the IRS didn’t send him a summary record of assessment. He did not seek any collection alternative, but did ask for withdrawal of the NFTL.

The Settlement Officer in the CDP hearing found that he only raised frivolous issues as to the underlying liability, and issued a Notice of Determination sustaining both the NFTL and the levies. Mr. Dail timely petitioned the Notice of Determination to the Tax Court.

Respondent eventually filed the present motion for summary judgment. Mr. Dail didn’t respond; this means that Judge Thornton could have granted the motion solely on that basis under Tax Court Rule 121(d).

But as Tax Court judges often do, Judge Thornton evaluates the merits in this case. Regarding the income tax debts, because Mr. Dail only presented frivolous arguments regarding his underlying liability, section 6330(g) provides that the Tax Court could not consider them (though Judge Thornton cites 6330(c)(2)(B)). Judge Thornton also upheld the section 6702 penalties; he could consider them in a CDP case because Mr. Dail had had no prior opportunity to dispute the liability, given that the Service may assess such penalties directly. He found that the penalties were appropriate because (1) Mr. Dail filed documents purporting to be returns, (2) his claims that his wages were not taxable was substantially incorrect on its face, and (3) his conduct was based on a position that the Service previously identified as frivolous. Finally, Judge Thornton finds no abuse of discretion in the Settlement Officer’s analysis of the collection issues in the CDP Hearing. He also warns Mr. Dail of a section 6673 penalty if he persists in these sorts of arguments.

Respondent, however, doesn’t quite get to a full resolution of the case. For tax year 2014, the Service issued a Notice of Deficiency as to this frivolous return seeking to assess the proper amount of tax on Mr. Dail’s wages. The Notice included a small accuracy penalty. Judge Thornton held that Mr. Dail was also barred from challenging 2014 because he received the Notice of Deficiency and had the opportunity then to petition the Tax Court, but did not.

Nevertheless, Judge Thornton denies summary judgment as to the 6662(a) penalty, because Respondent’s counsel promised, but did not deliver, documents supporting the managerial approval of the penalty required under section 6751.

It seems, at first blush, odd that Judge Thornton could and did deny summary judgment on this issue. He could have simply ruled in Respondent’s favor under Rule 121(d). Mr. Dail was barred from challenging the underlying 2014 liability under section 6330(c)(2)(B) because he’d had a prior opportunity to do so. He was also potentially barred under section 6330(g), because the issues he raised were frivolous.

So how did Judge Thornton reach this result? First, the Tax Court Rules are not ironclad; Tax Court judges often waive harshness under the Rules for pro se taxpayers. Judge Thornton certainly has the discretion to do so here. Further, the particular issue—managerial approval under 6751—isn’t a frivolous issue at all. So the bar under section 6330(g) probably doesn’t apply. Moreover, while Mr. Dail is barred from raising the issue under section 6330(c)(2)(B), the Service must consider, under section 6330(c)(1), whether the requirements of any applicable law or administrative procedure have been met. The Court has authority to review the Service’s analysis under an abuse of discretion analysis. Failure to consider the requirement under 6751 would constitute an abuse of discretion, and so the Court may order the Service to consider the issue. If Respondent’s counsel has the goods, then the Court may resolve this case without a remand to Appeals. If not, then a remand may theoretically be appropriate; more likely, however, Respondent’s counsel will conclude that the approval documents do not exist, and—to expedite their and Appeals’ workload—will concede the issue to fully resolve the case.

Docket No. 307-18L, Chang v. C.I.R. (Order Here)

In Chang, Respondent filed a motion to dismiss for lack of jurisdiction in this CDP case. Petitioner challenged years 1999 through 2010 and 2014 in the Tax Court. Respondent countered that, as to years 2003 and 2008, the Service sent a Notice of Intent to Levy on January 12, 2016 and received a CDP request on February 16. (The other years were more clearly barred from a Tax Court challenge, stemming as they did from an NFTL, for which Petitioner requested a CDP hearing four months late, rather than four days. He’d also challenged 1999 to 2002 in a prior CDP case in the Tax Court).

Petitioner’s CDP request for 2003 and 2008 “[did] not bear a postmark”. Therefore, Judge Leyden ordered Respondent (and later Petitioner) to research and present to the Court evidence on the mailing time between Petitioner’s home and the address on the CDP notice, which appear to both be in Hawai’i. Respondent filed a declaration from customer service manager of the “Downtown Station of Hawaii” (I’m not really sure where “Downtown Hawaii” is…), indicating that the letter was necessarily mailed on February 13, due to intervening weekends and holidays.

Petitioner filed an objection to Respondent’s declaration, noting that it can take up to two days for mail to be delivered between zip codes 96813 and 96816. For those curious, both zip codes are located near downtown Honolulu, Hawai’i, so interisland mailing (which might reasonably take longer than one day), is not in play.

So, Judge Leyden gave Petitioner an opportunity to submit similar information as did Respondent, ordering that Petitioner should present evidence about “when an envelope, properly addressed to the IRS requesting a CDP hearing would ordinarily have been received at the IRS and attach as an exhibit any statement by a U.S. Postal Service employee that petitioner obtains in support of his assertion that the CDP hearing request was timely mailed.”

A few questions that remain for me: how was the mailing delivered without a postmark? I originally thought that Respondent should simply argue that Petitioner cannot rely on the mailbox rule of section 7502, because under the applicable regulations at 26 C.F.R. 7502(c)(1)(iii), the envelope was not properly posted. But of course, the envelope did arrive at the Service, so it must have borne some postmark. The U.S. Postal Service is, after all, not in the business of delivering unposted envelopes. Hopefully Judge Leyden will designate a future order in this matter, so that we can discover the rest of the story.

 

Should the Tax Court Sua Sponte Continue a Case When Taxpayer Would Benefit from Representation

I saw the headnote of Ford v. Commissioner, 122 AFTR 2d xxxx, No. 18-1524 (6th Cir. 2018) and decided it was a case about hobby loss. It is; however, fellow blogger Peter Reilly pointed out to me that in the Sixth Circuit, Ms. Ford also raised as a ground for overturning the opinion the failure of the Tax Court to sua sponte continue her case when it was called at the Nashville calendar call of the Tax Court. You can find Peter’s post on the case here.

The idea that the failure to grant a continuance that the taxpayer never requested could form the basis for a successful appeal seemed a bit far-fetched to me. I guess it did to the Sixth Circuit as well since it found against Ms. Ford on that issue. Despite the difficult stretch to get to where Ms. Ford wanted the Sixth Circuit to go, the facts of the case regarding the need for some help from the court are worth discussing as a lesson for future litigants.

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Ms. Ford ran a restaurant and venue for emerging music artists in Nashville. From reading the opinion, I came away with the impression that the business had helped to launch the careers of some artists who had performed there. I also came away with the impression that the business had not produced a profit for many years and only continued to exist because of Ms. Ford’s generosity. The IRS audited her return and disallowed losses generated by the business, arguing that Ms. Ford did not engage in the business for profit but rather was motivated by something other than profit. The IRS sent Ms. Ford a notice of deficiency and she petitioned the Tax Court.

At calendar call, she appeared with her return preparer who is an enrolled agent. Enrolled agents can study and take the Tax Court test to practice before the court. I have written about the test before. Many have passed the test but the vast majority have not taken the test because Tax Court representation is not something they want to do. Most of the enrolled agents I have encountered are very knowledgeable about taxes and very diligent in representing their clients. I regularly recommend that individuals seeking the services of our clinic who do not qualify for our services seek advice from an enrolled agent in their neighborhood because I think the test to become an enrolled agent and the ongoing training they pursue generally makes them a reasonably priced, well-trained option for the types of individuals who my clinic must turn away.

Because representing someone in Tax Court falls pretty far outside the scope of what most enrolled agents do for their clients, going to the Tax Court with the client as happened in Ms. Ford’s case puts the EA, the client and the court in an awkward position. The EA cannot speak to the court on behalf of the client unless the EA has passed the Tax Court’s admission test. The client is left having to speak to the court and often the EA is not in a position to provide much, if any, guidance on the procedural aspects of the case even though they may know the substantive aspects of the case very well. The court can speak to the EA and provide direction. Judge Foley did that in this case but ultimately the taxpayer must be the one to talk to the court and the one to decide what to do.

Ms. Ford did not know how to best present her case and the EA she brought with her either did not know how to do it through her or did not know how to do it either. As a result she did a poor job of presenting her case. It’s hard to say whether she might have won with a good lawyer guiding the introduction of evidence. It would be expensive for her to hire a good lawyer to represent her but maybe not as expensive as losing the case. The EA may have advised her to obtain a lawyer and may have suggested lawyers she could use. The case does not get into those facts.

The case does bring out another facet of the dynamic at calendar call, which is that at almost every Tax Court calendar call, there are tax lawyers there as volunteers willing to meet with unrepresented taxpayers and provide advice. If you want to read more about the calendar call program, here is an article about a successful representation of someone encountered at calendar call. In Ms. Ford’s case, she was fortunate to meet with an excellent tax lawyer, Mary Gillum, who runs the tax clinic at Legal Aid Society of Middle Tennessee & the Cumberlands. Mary has been running the tax clinic there for almost two decades and is a fierce litigator, but Mary is hamstrung in helping someone like Ms. Ford. First, she is hamstrung because she has only a short time to size up the situation. Second, she is hamstrung because Ms. Ford is over the income guidelines of IRC 7526, which makes it difficult for Mary to take on full representation of the case. Lastly, Mary may have been hamstrung by the existence of the EA. Although the court suggested that Ms. Ford speak with Mary who was there to volunteer and assist unrepresented taxpayers, a taxpayer who brings a representative, even one not qualified to represent someone in the Tax Court, can create a barrier to effective counseling. The dynamic here is not one that the court discusses because it would have no way of knowing what happened. The program of volunteers at Tax Court calendars has helped many people but does not appear to have helped Ms. Ford in this situation.

Ms. Ford hired an attorney to handle her appeal but by then it was too late. The attorney handling the appeal is stuck with the record below. He wrote a brief arguing that the Tax Court erred in not deciding on its own that Ms. Ford’s case should have been continued and arguing that she had proved the business purpose of the venture. With respect to the first argument, it is difficult to believe that the attorney had a realistic expectation of success at the appellate level. With respect to the second argument, he did not have enough to work with based on the record at trial. He copied into his brief portions of the trial transcript regarding the back and forth between the court and Ms. Ford at calendar call as part of his effort to show a continuance should have been granted. I copy those below so you can see the difficult spot Ms. Ford had placed herself in by not coming to court with someone authorized to represent her. This also puts the court in an awkward spot but if the Tax Court granted a continuance every time someone appeared before it who did not have their act together, it would be granting multiple continuances at every calendar.

THE COURT: An option from the Court is to push this later on in the week to give you a little more time to gather that information. We could proceed Wednesday. What’s your position about proceeding to trial on this matter? Or would you still like some time to see if you could settle this?

  1. FORD: I really am confused about all of this.

THE COURT: Okay. Okay.

  1. FORD: I’ve never been to court like this.

THE COURT Okay.

  1. FORD: So I’m trying to learn.

THE COURT: I don’t know if – you may not meet the guidelines for Ms. Gillam. I don’t know. But if you do, then – well, you’ve been working with your CPAso in consultation with him, I think we should decide what the most prudent way to proceed is, whether you should proceed to trial or whether you should try and work something out or if you think you have a good case and you’re ready to go to trial then we’ll have a trial in this matter on Wednesday, but that would give you a couple more days to gather more information and also any other documentation that you think would support your position. It’s the Government’s position that this case is – that Ms. Ford didn’t have the requisite intent to make a profit?

  1. HARRIS: That is correct, Your Honor.

THE COURT: And –

  1. HARRIS: Your Honor will remember, we issued discovery on this and attempted to gather documents to show that this is like manner – it was conducted, and the Court does have an order, a standing pretrial order. I’m happy to look at what they have but this has drug on for quite a while.

THE COURT: This case hasn’t been –

  1. HARRIS: No, it hasn’t. I’m sorry. No, it hasn’t but we have been seeking information since last fall.

THE COURT: And is there any reason why that information hasn’t been provided?

  1. FORD: Well, I was sick with pneumonia for a couple of months with pneumonia and bronchitis, and there was a storm that hit the Bell Cove, my place of business. …

THE COURT: Well, Ms. Ford, if we proceed to trial, one thing you have to be aware of is there are specific rules that you’re going to have to meet in order to make your case, and of course you can consult with your CPA. I’m sure your CPA is aware of what the rules under 183 are and what the standards are and exactly what Ms. Ford is going to have to establish in order to meet those rules. And it’s going to be your contention that she meets those standards; is that correct?

  1. KING: Yes.

THE COURT: Well, what I can do is schedule this trial for Wednesday at ten o’clock and that doesn’t mean that the parties can’t sit down and talk prior to Wednesday. I would anticipate that it might make some sense for you guys to talk and to see if something can be worked out. I don’t know what the merits are in this case. I don’t know what evidence you plan to present. Can you give me an idea about what kind of evidence you plan to present?

  1. KING: Well, I think she will be prepared to go through the rules to establish that she was in the business of making money.

THE COURT: Okay. All right. So any witnesses, Ms. Ford, that you plan to call?

  1. FORD: I don’t know. Right now I’m not sure what 183 is even.

THE COURT: Okay. Well consult with your CPA. He’ll know what the rules are and what’s going to be important for you is I’m going to give you the opportunity to testify and when you testify, you just make sur[e] that you hit all the important points. It also helps to have documentation, you know, business licenses and more things that support your contention that you were in this endeavor to make a profit.

  1. FORD: Well I wouldn’t have gone into it if I wasn’t.

THE COURT: Okay.

  1. FORD: That would be silly.

THE COURT: Okay.

  1. FORD: I mean, I’ve generated millions of dollars through the music industry from helping everybody there. There are so many, George Jones, *13John Anderson – I can’t tell you how much people I’ve helped through there. And I didn’t go in there to fail, you know. I would not want to fail.

THE COURT: All right. Well, this is what we’ll do. We will schedule the trial for ten o’clock Wednesday. And do we have a stipulation of facts?

  1. HARRIS: Well, Your Honor, I have one prepared. It is not signed and if I could get some clarification on exactly, is Mr. King a witness? Is he – what role he’s going to play. Ms. Ford didn’t file a ––– I’m somewhat at a loss here.

THE COURT: Okay. Mr. King?

  1. KING: I can only be a witness.

THE COURT: Okay.

  1. KING: I cannot practice.1

THE COURT: So you’ll be a witness. Of course, you can — I’m going to anticipate that you’ll be working with Ms. Ford so that she has a better understanding of what the rules are, and I would also suggest that you meet with Ms. Gillam. Ms. Gillam is right behind you in the first row and talk to her, and then I think she’ll be able to give you a better — you, the two of you, go in one of the counsel’s rooms, talk with Ms. Gillam, so that you can get a better assessment of the strength of your case and just how prudent it is for you to proceed.

[Calendar Transcript, pgs. 6-12 (emphasis added)]

Conclusion

For most people going to Tax Court, proving their case without a qualified representative will be very difficult. In deciding whether to hire someone, the taxpayer has to take into account the amount at issue and the ongoing nature of the matter in dispute. Assuming that Ms. Ford wanted to continue to run the business, she might have found the calculus for hiring a qualified representative in her situation would have led her to hire someone. Because of the complexity of proving a hobby loss case and the potential for the issue to continue on in future years, someone in Ms. Ford’s situation should think hard before proceeding in the Tax Court without qualified representation. Similarly, someone in the position of this EA must also try to steer their client to a qualified representative even if they have a good grasp of the substance of the case.

 

 

The EITC Ban – It’s Worse Than You Realized

We welcome back guest blogger Bob Probasco. Bob tells a disaster story with a happy ending but we must keep in mind that the happy ending only occurred because the low income taxpayer had found her way to a clinic where she received free and highly competent representation. Other stories similar to this one exist in the system without the happy ending provided here.  

As we have written before, the time for contesting the EITC ban in Tax Court is unclear. Another possible avenue for taxpayers in the position of Bob’s client is to seek orders regarding the ban from the Tax Court. I cannot say whether the taxpayer would have obtained relief in the Tax Court but the existence of the prohibited assessments would provide a basis for an injunction which might have gotten the client to the right place. Keith

There is a film genre often referred to, because of the primary plot device, as “disaster movies.” The golden age was the 1970s, with films like Airport, The Poseidon Adventure, and The Towering Inferno. Minor actions or problems interact in ways that create huge challenges. Each time the characters survive one obstacle, losing a few members of the group in the process, a new threat arises. How many, and which, characters will eventually survive?

The tax administration equivalent is the earned income tax credit (EITC) ban.

The EITC ban process is seriously flawed, as has been pointed out frequently. Les discussed it here on Procedural Taxing in blog posts in January 2014 and July 2014. National Taxpayer Advocate Nina Olson has been complaining about it for years, with the most detailed coverage in her 2013 Annual Report to Congress. Patrick Thomas made a presentation on it (outline available on the LITC Toolkit website, if you have access) at the December 2016 LITC Grantee Conference. Les and William Schmidt addressed the specific issue of Tax Court jurisdiction over the ban in 2016 and 2018 respectively. I strongly recommend a thorough review of all of the above – including comments to the blog posts! – to anyone who deals with taxpayers who claim the EITC.

This post discusses the IRS administrative process for applying (and correcting?) the ban. It also points out how the interaction of the EITC ban process with problems elsewhere in the tax administration process can turn a serious issue into an absolute disaster. This is the story of one such disaster.

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Background

Section 32(k)(1), added by the Taxpayer Relief Act of 1997, establishes that the EITC shall not be allowed for

the period of 2 taxable years after the most recent taxable year for which there was a final determination that the taxpayer’s claim of credit under this section was due to reckless or intentional disregard of rules and regulations (but not due to fraud)

If there is a final determination that the taxpayer’s claim of credit was due to fraud, the disallowance period is 10 taxable years instead.

This is an absolute ban but there is also an indefinite potential disallowance, in Section 32(k)(2):

In the case of a taxpayer who is denied credit under this section for any taxable year as a result of the deficiency procedures under subchapter B of chapter 63, no credit shall be allowed under this section for any subsequent taxable year unless the taxpayer provides such information as the Secretary may require to demonstrate eligibility for such credit.

Treas. Reg. section 1.32-3(b) explains that

Denial of the EIC as a result of the deficiency procedures occurs when a tax on account of the EIC is assessed as a deficiency (other than as a mathematical or clerical error under section 6213(b)(1)).

And Treas. Reg. section 1.32-3(c) specifies Form 8862 as the information required to demonstrate eligibility. The instructions make clear that the taxpayer should not file Form 8862 during the years that a ban applies, but it will be required if the EITC is disallowed, even absent a final determination of fraud or reckless or intentional disregard of rules and regulations, to claim the EITC in any other years. If the form is properly completed and the IRS determines the taxpayer is eligible for the EITC, then the taxpayer is re-certified and need not submit Form 8862 again – unless the EITC is denied again.

Under Section 6213(g)(2)(K), the IRS can adjust the tax return by math error correction, rather than the deficiency procedures, if the taxpayer claims the credit during the ban period or without providing the required information for recertification. Nina Olson fought against that idea for years but it was eventually enacted in the Protecting Americans from Tax Hikes Act of 2015.

First obstacle: Location and language

Our LITC client – let’s call her “Maria” – was originally audited with respect to her 2014 return. She did a very good job of responding to the audit before even coming to our clinic. Most often, issues in an EITC audit concern proving relationship to the qualifying child or that the child lives with the taxpayer. Maria resolved those to the satisfaction of Exam/Appeals but one stumbling block remained: filing status. She filed her return as “single,” which of course should have been “Head of Household,” but the IRS insisted that she was married. Section 32(d) specifies that married taxpayers can claim the EITC only if they file joint returns. The IRS reclassified her filing status as “Married Filing Separately.” That was where the resolution bogged down, because Maria was adamant that she was not married.

Unfortunately, Maria lives in Texas, one of only ten states (plus the District of Columbia) that recognize common law marriage. She didn’t know that and she didn’t realize what the IRS was arguing from the correspondence she received. Maria doesn’t speak English and the “common law” part got lost in the translation by her son, who may not be familiar with the concept either. When she came to our clinic, we were able to explain the problem to her. We also determined that she had two arguments for claiming the credit.

First, she arguably did not meet the requirements under Texas law for a common law marriage. She had lived with her putative husband – let’s call him “Jose” – but she did not intend to be married and did not hold herself out to others as being married. We were persuaded as to the absence of intent by her obvious surprise when we explained what the IRS was saying. While corresponding with Exam/Appeals, before she came to the clinic, she submitted proof that she was not married: a certificate from the county clerk’s office that there was no record of a legal marriage between Maria and Jose. That’s not the type of evidence you’re likely to submit if you are aware of the existence of common law marriage. And if you’re not aware, that certainly suggests that you lacked the intent.

The more difficult aspect was the “holding out” requirement, because Maria and Jose had filed joint tax returns for several years prior to 2014. Jose may have held himself out to the IRS as married to Maria but I don’t think she did. She didn’t realize what the tax returns she signed meant. She thought Jose was claiming her as a dependent, not that she was presenting herself as his spouse. But it was always going to be difficult, if not impossible, to prevail on the first argument.

Our second argument was better. Under Section 7703(b), Maria could file her return as Head of Household, even though married, if (a) she maintained a household for a child who lived there and (b) she and Jose lived apart for at least the last six months of the year. Under Reg. 1.32-2(b)(2), such a return is not subject to the limitation of Section 32(d).  Jose had moved out in 2013; he was working in the oil fields in South Texas and living in his truck to save money to start a business. When he moved out, she even began paying him rent.

Second obstacle: Exam/Appeals and evidence

Unfortunately, there was no documentary evidence that Jose no longer lived there. He still received mail at the address where Maria lived and continued to use that address on subsequent tax returns he filed. You can’t get mail addressed to a truck and you can’t use the truck as your address on a tax return. There was no rental agreement or utility bill for the truck either, so the IRS could find no records showing a different address for him. So as far as Exam and Appeals were concerned, he still lived with Maria.

The IRS also was not satisfied with the substantiation for the agreement to pay rent. Maria and Jose documented that arrangement with a very formal rental agreement. (How many taxpayers would think to do that?) Unfortunately, Maria’s copy of the agreement was unsigned and it was only for a term of one year, which did not cover all of 2014. Maria continued paying rent after that but they did not think to prepare a new agreement until she was audited. Also, Maria didn’t have records of the payments to Jose, because she paid him in cash.

Maria’s case stumbled over what appears to be a larger problem with correspondence audits. During my limited time at the LITC, Exam and Appeals both appear to rely exclusively on documentary evidence. That may be understandable, given drastic reductions in staffing and the absence of face-to-face meetings in correspondence audits, but I don’t think it’s reasonable – particularly on something like this that had huge potential consequences. We offered to arrange a telephone conference (including translator) with Maria and could have put together an affidavit if they preferred that. But they just rejected the idea of testimony. Luckily, Counsel can and does accept testimonial evidence, so we were still hopeful. Unfortunately, this meant that we had to go to Tax Court, when we encountered another obstacle.

Shortly after we filed the Tax Court petition for the 2014 tax year, the IRS sent an audit notice for 2015. The same process repeated with the same result – Exam and Appeals rejected our explanations due to a lack of documentary evidence and Maria received a notice of deficiency. The IRS had frozen the refund for 2015 during the audit, so further delay did create some financial hardship.

Third obstacle: Error in a ministerial or administrative action

Once Appeals returned the docketed case for 2014 to Counsel, we submitted a declaration by Maria setting forth what her testimony would be. Within a week, the IRS attorney agreed to concede the case in full. The stipulated decision for 2014 was filed a day after we filed the petition for 2015. And in less than three months, we had a full concession from Counsel for 2015 and another stipulated decision. So, great results for Maria, right? Alas, here’s where we ran into an unrelated issue that had a very unfortunate interaction with the EITC ban.

I had never given much thought to the question of how Exam and Appeals proceed after issuing a notice of deficiency. I should have, although I’m not sure I could have avoided this problem. Internal Revenue Manual (IRM) sections 4.8.9.25 and 4.8.9.26 set forth the process when the taxpayer petitions and when the taxpayer defaults, respectively, after a notice of deficiency. It seems to be an elaborate process with many safeguards – a tax litigation counsel automated tracking system, a related docketed information management system, and checking the Tax Court website if not in those systems to confirm that the taxpayer defaulted. There is even a follow-up process for the occasional situation when the responsible employee receives the docket list after tax was assessed.

For both 2014 and 2015, we filed Tax Court petitions timely. As we all know, Section 6213(a) states in unequivocal terms that

no assessment of a deficiency . . . shall be made, begun, or prosecuted until such notice [of deficiency] has been mailed to the taxpayer, nor until the expiration of such 90-day or 150-day period, as the case may be, nor, if a petition has been filed with the Tax Court, until the decision of the Tax Court has become final.

This is a disaster story, though, so you’ve undoubtedly guessed (correctly) that for both years the IRS assessed tax and reversed the EITC, while there was a pending Tax Court case. The IRS imposed the EITC 2-year ban in both cases and issued Notice CP 79A.

Why did this happen? I really don’t know. While I was writing this post, out of curiosity I reviewed the limited number of Tax Court deficiency cases our clinic handled in our two years of existence. For all the non-EITC cases, transaction code 520 “bankruptcy or other legal action filed” was posted to the transcript consistently in less than a month after the date the petition was posted to the Tax Court online docket. But for three of our six EITC cases in Tax Court, including Maria’s cases for 2014 and 2015, transaction code 520 was posted to the transcript significantly later: 64, 212, and 221 days after the respective petition was posted to the Tax Court docket. Every process is only as strong as its weakest link – in this case, human error or delay. Someone somewhere didn’t realize that we had challenged the notice of deficiency and didn’t get the information into the computer, so the assessments – and EITC bans – proceeded for those three cases. (Our other client made it to safety relatively early in the process.)

I reported the issue of premature assessments from these cases in the Systemic Advocacy Management System (SAMS) last year, and I suspect other people have done so as well. It’s always a problem, but the consequences can be worse when the EITC ban is put into play.

Fourth obstacle: The difficulty of reversing an illegitimate assessment and EITC ban

Section 6213(a) provides a remedy if the IRS assesses or takes collection actions while a Tax Court case is pending:

Notwithstanding the provisions of section 7421(a), the making of such assessment or the beginning of such proceeding or levy during the time such prohibition is in force may be enjoined by a proceeding in the proper court, including the Tax Court, and a refund may be ordered by such court of any amount collected within the period during which the Secretary is prohibited from collecting by levy or through a proceeding in court under the provisions of this subsection.

It doesn’t provide for enjoining the imposition of the EITC ban, though. In addition, IRM 4.13.3.17 provides that errors concerning an EITC assessment can be resolved through the audit reconsideration process, although presumably this is intended to apply when the taxpayer provides additional documentation after a legitimate assessment.

Perhaps foolishly, we tried to resolve the problem for 2014 informally. I gave the IRS attorney assigned to the case a copy of the notices issued by the IRS and asked if she could have it corrected. Because she had already referred the docketed case to Appeals, she passed that documentation along to the Appeals Officer. I followed up with the Appeals Officer twice, with no response. But the problem was eventually resolved; the assessment was reversed, and the IRS mailed Notice CP 74, recertifying Maria for EITC. Problem solved, and since the Tax Court case was still pending, no harm, no foul.

For 2015, I responded directly to the assessment and Notice CP 79A. That notice presents the ban as a fait accompli; there was no reference to what the taxpayer should do if she disagreed with the IRS action. As noted above, the recertification process applies only after the ban period. The accompanying Notice CP 22E for the assessment suggested the taxpayer call if she disagreed with the changes. Instead, I wrote a letter – remarkably polite under the circumstances – pointing out that the assessment and imposition of the ban were illegal because of the pending Tax Court case and requesting the IRS “take all necessary corrective actions immediately.” Exactly one month later (which qualifies as “immediately” in any large bureaucracy), the assessment was reversed. We had filed the stipulated decision in the meantime and finally, almost six months after our letter and five months after the stipulated decision, the IRS issued a refund. This was a long time for a low-income taxpayer to wait for a refund, but better late than never.

Let’s summarize the timeline, because this is getting confusing.

2014 tax year

  • Notice of deficiency – 11/30/2016
  • Tax Court petition filed (timely) – 2/24/2017
  • Assessment/ban – 4/17/2017
  • “Bankruptcy or other legal action” posted per transcript – 5/3/2017
  • Clinic contacts Counsel and Appeals regarding the premature assessment – 6/5/2017, 6/21/2017, 7/24/2017
  • Assessment reversed – 11/13/2017
  • Tax Court stipulated decision – 1/23/2018

2015 tax year

  • Notice of deficiency – 10/16/2017
  • Tax Court petition filed (timely) – 1/16/2018
  • Assessment/ban – 2/26/2018
  • Clinic letter to IRS – 3/2/2018
  • Assessment reversed – 4/2/2018
  • Tax Court stipulated decision – 4/5/2018
  • Refund issued – 8/3/2018
  • “Bankruptcy or other legal action” posted per transcript – 8/29/2018

Fifth obstacle: Enter the math error adjustment

Just when we thought Maria’s problems were over, on 7/2/2018 she received Notice CP 12, a math error adjustment denying EITC, for her 2016 tax return. We either didn’t notice or didn’t realize the significance at the time, but when the IRS reversed the premature assessment for her 2015 tax year, it did not issue Notice CP 74 recertifying her for EITC.

There had been an assessment of tax, on account of the EITC, as a deficiency for 2015, so it met the requirements of Treas. Reg. section 1.32-3(b) and Section 32(k)(2). Of course, that assessment for 2015 was illegal and had been reversed. The stipulated decision in the Tax Court case meant there never was and never would be a legitimate final assessment or determination of reckless or intentional disregard of rules or regulations for 2015. Because there is no process to confirm the validity of the EITC ban first, the failure to recertify automatically resulted in issuance of the math error adjustment.

Luckily, although a math error adjustment can be assessed without judicial review, taxpayers can simply request that the adjustment be reversed within 60 days, although – if appropriate – it can be re-asserted through the deficiency process. Section 6213(b)(1) and (2). That’s exactly what we requested for the 2016 tax year, by letter on 7/24/2018.

And, of course, since this is a disaster story, you know that Maria also received Notice CP 12 for her 2017 tax return.

Sixth obstacle: Further delay for an audit?

The IRS mis-handled our protest of the math error adjustment for 2016. Of course. Notice CP 12 states:

If you contact us in writing within 60 days of the date of this notice, we will reverse the change we made to your account. However, if you are unable to provide us additional information that justifies the reversal and we believe the reversal and we believe the reversal is in error, we will forward your case for audit. This step gives you formal appeal rights, including the right to appeal our decision in the United States [Tax] Court before you have to pay additional tax. After we forward your case, the audit staff will contact you within 5 to 6 weeks to fully explain the audit process and your rights. If you do not contact us within the 60-day period, you will lose your right to appeal our decision before payment of tax.

That’s consistent with Section 6213(b) as well as IRM 21.5.4.5.3 to 21.5.4.5.5 (general math error procedures) and IRM 21.6.3.4.2.7.13 (EITC math errors specifically). A substantiated protest can result in just reversing the math error adjustment; an unsubstantiated protest will result in referral to Exam.

The IRS treated our protest of the math error adjustment for 2016 as an unsubstantiated protest and referred it to Exam. Perhaps they misclassified our protest because they expect a substantiated EITC protest to provide documentation regarding relationship or residence or SSNs. Our protest was based on a premature assessment and assertion of the ban, and the failure to reverse the ban imposed as a result of the audit of 2015. We certainly had substantiated our basis for that. But when you provide a type of substantiation that they’re not anticipating . . .

So we received an audit letter dated November 9th. Further delay before Maria will receive her refund. To add insult to injury, the notification of what was happening was inadequate and would have been confusing to an unrepresented taxpayer. There was no response to the protest, telling us that they were referring the case to Exam for review. That might have provided an opportunity to clarify the nature of our protest before initiation of the audit. The audit letter did not explain the connection with the math error adjustment. For that matter, the IRS did not – as specified in the IRM – abate the disputed adjustment.

I have a sneaking suspicion that the same thing would have happened when we protested the math error adjustment for 2017 as well. Luckily . . .

The rescue party arrives! Maria makes it to safety!

Our efforts hadn’t met with much success, so we contacted our Local Taxpayer Advocate office in mid October. The case advocate spent a lot of time and effort, chasing from one office to another on Maria’s behalf. He pointed out the premature bans, the decisions by the Tax Court, and the IRS policy against auditing an issue that were examined in either of the two preceding years with no change or a nominal adjustment. Even after he elevated the discussion to managers in the operating units, there was still a lot of resistance. I’m not sure he would have succeeded without the gentle reminder of the possibility of a Taxpayer Assistance Order. Just as I was finishing this post, he called us with the good news. The 2-year ban is being lifted, the two math error adjustments are being reversed, and the examination of 2016 is being closed. Soon Maria will be getting the remainder of the refunds she requested on her 2016 and 2017 tax returns.

Final thoughts

I’m getting used to the unfortunate difficulty of convincing Exam/Appeals that our clients are entitled to the EITC. I didn’t worry that much about the EITC ban because most of the time either we prevail or our clients aren’t entitled to the EITC and won’t claim it in the future anyway. I certainly didn’t anticipate how much trouble the EITC ban can cause even when we win the battle over the EITC itself.

TAS Systemic Advocacy also continues to look at these issues. They approached me after hearing about the case, before I even got around to reporting it in SAMS. Nina Olson has been fighting the problems with the EITC ban for years but still meets with resistance. Maybe this example of how much can go wrong will help in that fight. We can only hope.

The positive part of any ordeal like this is that, amid all the mindless adherence to byzantine and flawed processes, you can still encounter the IRS working the way it should: getting the right result, protecting the government fisc while also protecting taxpayer rights. In Maria’s case, those bright spots were Counsel, the case advocate at LTA, and the folks at TAS Systemic Advocacy. Without people like them, these tax issues can be devastating, not just for Maria but also for a lot of other taxpayers in similar situations.

 

Questions of Fact, Questions of Law, and How and When to Argue Them: Designated Orders, November 5 – 9, 2018

Caleb Smith of the University of Minnesota brings us this week’s designated order blog post. The Nordberg case Professor Smith discuses was tried at the most recent Boston calendar where my students were watching the case with me.  I told them that as a retired federal employee, I was 100% behind Mr. Nordberg and as a tax professor I was 100% sure he would lose.  I do not often have that degree of certainty. Keith

Is It Enough That The Parties Agree There Is No Issue of Material Fact? Gage v. C.I.R., Dkt. # 23874-17 (here)

There have been no shortage of orders denying summary judgment to the IRS covered at PT (Judge Gustafson, as covered here, has been one of the leading proponents). What makes the order in Gage slightly different is that both parties move for summary judgment, and neither receive it.

As a matter of policy, the purpose of summary judgment is fairly straightforward: to preserve judicial resources and avoid needless trials when there really isn’t anything else needed for the Court to render a decision. Even so, as demonstrated in Gage, parties can’t simply agree to the applicability of summary judgment as a “shortcut” to an early decision.

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Gage involves what appears to be a simple (or at least narrow) legal question: whether a particular $875,000 payment to the US government is deductible as a business expense. The payment arose from a lawsuit brought against the petitioner’s business by the U.S. government under the National Housing Act. The record in Gage appears to be fairly developed at the time of the summary judgment motions, and much, if not all, of the case appears to hinge on the nature of the resulting settlement payment. In a nutshell, if the payment at issue was a “fine or similar penalty” to the government then the payment is not deductible and the petitioner loses. See IRC 162(f) and Treas. Reg. 1.162-21. The case, therefore, is almost entirely an issue of the characterization of the payment.

In dismissing both motions for summary judgment, Judge Panuthos lists three large issues of “material fact” that he believes continue to be genuinely in dispute: “(1) the characterization and purpose of the $875,000 settlement payment made by petitioners to the government; (2) whether that $875,000 payment represented compensation to the government or double damages; and (3) if that $875,000 payment represents double damages, whether the parties to the settlement agreement intended the payment to compensate the government for its losses or to deter and punish defendants for their conduct.”

I’m not positive, however, that I agree with Judge Panuthos in describing these three outstanding issues as ones of “material fact.” The problem with characterization cases like this is the blurring/blending of issues of “fact” and issues of “law.” Is the first point Judge Panuthos lists (the “characterization and purpose of the $875,000 settlement payment”) really an issue of “material fact” or a matter of law? I would say the petitioner is arguing that the (undisputed) facts in the record necessarily lead to the characterization of the payment as compensatory damages. If the fact that the payment was compensatory damage is found, the law should apply in their favor. Full stop. Conversely, the IRS is arguing that those same (undisputed) facts necessarily lead to the characterization of the payment as a fine or penalty. If that fact is found the law should apply in their favor. Full stop. In other words, the parties are agreeing on the “facts” (the background of the settlement) but disagreeing on how they should be interpreted as “ultimate facts” leading necessarily to the legal outcome. One may wonder if a dispute on the “ultimate facts” isn’t the same as a dispute on the law as applied to the facts. If that were the case, this could be a good candidate for summary judgment: the Court would simply fulfill its role as arbiter of determining the side that was “entitled to a judgment as a matter of law.”

And yet, both summary judgment motions are denied. Why might this be?

In the end, I think the parties are arguing that there are enough undisputed facts in the record for the Court to reach a judgment as a matter of law and Special Trial Judge Panuthos is just saying, “No: the Court needs more.” It isn’t necessarily that there remains a disputed issue of material fact, but just that there aren’t enough facts in the record for either side to prevail. All Judge Panuthos has is the background facts of the transaction -but the characterization issue requires a lot more before anyone is “entitled to judgement as a matter of law.” I’d note that this is the case even though the burden is on the petitioner to show that they are entitled to the deduction. (See INDOPCO, Inc. v. C.I.R., 503 U.S. 79 (1992).) It would be a different case if it were being submitted fully stipulated under T.C. Rule 122 rather than summary judgment under T.C. Rule 121. The IRS can’t say “the petitioner hasn’t met their burden, so we are entitled to judgment” at the earlier stage, since the petitioner still could put evidence into the record. In that respect, even though this order denies the IRS summary judgment, I’d read this as a warning to petitioner: you probably won’t win unless you put a little more into the record.

All of which may all be my long-winded way of saying that blended issues of law and fact are generally bad candidates for summary judgment.

Another Characterization Issue: Is Your Underperforming Pension Really a Roth IRA? Nordberg v. C.I.R., Dkt. No. 1426-17 (here)

Procedurally, there isn’t much of interest to this order -a bench decision finding against the taxpayer on a novel legal argument. Further, there wasn’t really much suspense to the decision: the novel argument put forth by the taxpayer (that his government pension should be taxed the same as a Roth IRA) was pretty quickly dismissed by Judge Gustafson.

However, the case does provide one more addition to the list of judicial phrases that signal you’re going to lose, or at least going to lose in Tax Court. To wit: “The principle flaw in [the petitioner’s] argument is that there is no basis for it in the Code.” That is a pretty big flaw when arguing in Tax Court. And in that way Nordberg serves as a somewhat useful teaching tool: a reminder that the Tax Court is not a court of equity, and not all arguments are created equally.

Although doomed to fail, it is possible the pro-se petitioner had a greater legal background (or at least believed he did) than most: Mr. Nordberg was an employee of a member of the US House of Representatives for almost 20 years. But a little knowledge can be a dangerous thing, and the style of argument put forth by Mr. Nordberg demonstrates that.

Mr. Nordberg’s primary argument is based on “general principles” of the Code, rather than focusing on the specific Code sections at issue. With regards to retirement income, Mr. Nordberg has derived the following general principle from the Code: if your contributions to the retirement plan are deductible, you have an IRA with the interest and principal taxable on receipt. If your contributions to the retirement plan are non-deductible, you have a Roth IRA with neither the interest or the principal taxable on receipt.

Mr. Nordberg made non-deductible contributions to his pension so, he reasons, all of his pension should be taxed like a Roth IRA. To repeat Judge Gustafson, the problem with this argument is that it has no basis for it in the Code. A second problem, however, is that it also only looks at half of the contributions to the pension (conveniently, the non-deductible portion).

Mr. Nordberg had a government pension through the Civil Service Retirement System (CSRS). The terms of the pension were that Mr. Nordberg made mandatory after-tax contributions (somewhat similarly to a Roth IRA). However, the employer also matched these payments (which were effectively “pre-tax” to Mr. Nordberg). The Code and the court in Malbon v. U.S., 43 F.3d 466 (9th Cir. 1994), treat annuity payments from these arrangements as partially taxable and partially non-taxable. The non-taxable portion being only that amount which represents the post-tax contributions by the taxpayer (with that amount determined pro-rata based on life-expectancy tables). Everything that isn’t the taxpayer’s contribution (including interest) is taxable. As Judge Gustafson puts it, Malbon “resolves the issues in this case: Mr. Nordberg’s CSRS annuity payments are not excluded from taxable income. Only a portion of them are non-taxable.” In other words, the Code and case law conclusively determines that an annuity payment is taxed unlike either a Roth IRA or regular IRA. There is no “general principle” of tax law that will save you when Congress and the Courts have spoken otherwise.

Similarly, and as a closing point, arguing about general notions of fairness is unlikely to get you very far in Tax Court. One of the main concerns of Mr. Nordberg appeared to be both that his government pensions rate of return was less than a private Roth IRA may have been, and that he perceived the tax consequences to be worse. Without a hint of irony speaking to a long-time employee of a US House Representative, Judge Gustafson notes that the Court doesn’t have the “authority to depart from the law Congress has enacted and to instead devise rules of taxation based on felt fairness.” In other words, if you want fairness take it up with your former boss.

Odds and Ends: Failing to Show Up

The remaining four designated orders concerned taxpayers that failed to show up, literally or figuratively, for their case. On the literal side, you have Nuss v. C.I.R., Dkt. No. 22655-17S (here): a bench opinion by Judge Carluzzo against a petitioner that didn’t show up for his own trial. Similarly, Judge Gustafson dismissed the petitioners case in Hochschild v. C.I.R. (here) for failure to properly prosecute when the taxpayer failed to show up to trial or otherwise respond to numerous inquiries about her case. Moving to the more figurative side of failing to show up, you have McHenry Jr. v. C.I.R. (here) granting the IRS summary judgment in a CDP case where the petitioner didn’t provide IRS appeals any financial information, but insisted they should be placed in Currently Not Collectible status.

Lastly, and decidedly on the figurative side of the failing-to-show-up spectrum, you have Tunsill v. C.I.R. (here), which involves the increasingly popular motion of dismissing for failure to state a claim on which relief can be granted. The petitioner, perhaps dazzled by the claims of hobbyist tax “lawyers” found online, goes out of their way to make clear that they are not, in any real way, showing up for their tax court case. Generally when a taxpayer feels the need to state, in their petition, that they are “making a special appearance before the court” (perhaps intending to demonstrate that they are not consenting to jurisdiction by sending a petition?) it actually means they aren’t really showing up at all. This case does not appear to be an exception, and Judge Leyden grants the dismissal.

The petition reads slightly unlike most tax protestor arguments, but maintains that same critical misunderstanding of what a Notice of Deficiency (and indeed, tax assessment) entails. The taxpayer’s words in their petition illustrates the confusion better than I could hope to: “In conclusion, [the taxpayer] is being accused of a commercial crime (offense against revenue laws). Pursuant to law, the person making the claim must register their claim to make a proper assessment, so that there can be a demand for performance. Without a demand for performance, there can be no neglect. Without neglect, there can be no crime. Without a crime, there can be no court proceeding.”

Tax law and tax procedure is confusing, even for those that work in the field. That the petitioner in this case referenced things like a phantom Form 1099 OID, the UCC and the 4th and 5th Amendments leads me to believe that he may have been the victim of some dubious online research. I commend the Tax Court for reaching out to the taxpayer and IRS with a conference call before moving forward with the dismissal. Psychologically it is much easier to believe things that benefit you: like the tax protestor that recently assured me that he does not need to file or pay taxes because of the “privacy act.” I only hope Mr. Tunsill’s dismissed case will be the wake-up call to seek qualified professional advice rather than a signal to him that the Court systems are a part of the IRS conspiracy.

 

 

 

 

 

 

 

 

Designated Orders: The Nonresponsive Petitioner (10/29/18 to 11/2/18)

This week’s post on designated orders is written by William Schmidt of the Kansas Legal Aid Society. Similar to the statistical post on designated order provided by Patrick Thomas a few weeks ago, William uses a slow week in designated orders to provide us with a reflective post on one of the root causes of trouble in Tax Court and with the tax system generally. Keith

The week of October 29 to November 2, 2018 had a total of three designated orders. To begin, the first order, here, is a short order regarding a joint filing of a stipulation of settled issues.

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Short Take: Docket No. 21940-15 L, James L. McCarthy v. C.I.R.

The second order, here, discusses ownership of real estate by a trust that IRS Appeals determined has been acting as the petitioner’s nominee. The petitioner has submitted both an offer in compromise and a partial payment installment agreement. Since Appeals determined the petitioner is connected with the trust, it becomes a factual issue regarding the real estate in question being an asset of the trust (affecting petitioner’s assets to determine his collection alternatives listed above). The IRS stance is that the property in question could be used to satisfy petitioner’s liability. The parties are to submit their memoranda regarding their arguments concerning the ownership of the property and petitioner’s ability to enjoy its benefits or treat it as his own during the ownership period by November 14.

The Nonresponsive Petitioner and Related Issues

Docket No. 18347-17 L, Kazuhiro Kono v. C.I.R., available here.

This case does not offer much for analysis. The petitioner did not submit requested documents to the IRS, did not respond to a second request, did not file a response to the IRS motion for summary judgment, and did not appear at the Tax Court docket. As a result, the Tax Court granted the IRS motion for summary judgment based on petitioner’s overall lack of responsiveness.

Since there is not much to focus on this week, I am going to take a detour and focus the rest of the blog post on an examination of the responsiveness of taxpayers during the Tax Court process. I am working on a presentation with some of the others who post here on designated orders so I have been doing some big picture thinking about Tax Court and designated orders.

  1. Types of Clients

In practice, I get to meet several types of clients. There are four categories I can think of who inherently have issues in dealing with IRS bureaucracy:

  • Low Income Taxpayers – The inability to afford higher education may be the beginning of barriers to understanding tax issues for some low income taxpayers. Another is the inability to take time to communicate with the IRS. Taxpayers often cannot take off work in order to have time to wait on the phone in order to deal with tax issues, especially if they are on a tight budget. The lack of funding for the IRS has increased wait times in order to talk with a customer service person on the phone, which leads to dissatisfaction and quitting attempts to deal with the IRS.
  • Disabled – There can be many categories here, whether physical or mental disabilities. If a taxpayer does not have the energy, ability or capacity to deal with tax issues, that person might be confused by the tax system or give up because it takes too much to handle.
  • Elderly – Again, this group may be declining in health or mental ability and lack the energy, ability or capacity to deal with tax issues.
  • English as a Second Language – I am using this category to cover all those who have difficulty with English, whether they are immigrants to the United States or not. Those who do not speak the language or understand American culture have that additional barrier to add to issues with understanding tax terminology or dealing with the IRS.

One client of mine has a case regarding financial disability (see past Procedurally Taxing postings here and here). She had paranoia and a nervous breakdown that prevented her from signing her 2012 tax refund before the 3-year deadline expired. I have had to be extra patient to work with her to fill out paperwork and get medical support regarding her disability. I am trying to prove that her medical issue should allow her an exception to the 3-year deadline.

Another client is a Spanish speaker who was audited for claiming her grandchildren as dependents and including other child-related benefits. After providing rounds of documents to the IRS, she was tired and got to the point where she did not want to gather more documents for me to provide to the IRS. I am glad to say that we have been successful in convincing the IRS to allow her to claim those dependents, but they wanted me to speak with my client about substantiating her future claims correctly.

  1. Nonresponsiveness

In surveying several of the past designated order postings, I looked for patterns of nonresponsive petitioners. Some of the broadest patterns are the lack of providing documents and ignorance of procedures.

Often, the IRS requests that a client fill out a Form 433-A or submit unfiled tax returns. For disorganized clients, that is an uphill battle, discussed more in the next section. Additionally, filing tax returns (especially in the off-season) may be a cost that taxpayers are unable to overcome.

For the unrepresented taxpayers, it does seem like they have a do-it-yourself mentality. Unfortunately, that means their courage leads them into areas for which they are not prepared. These taxpayers venture into areas of court or tax procedure they are ignorant of and it often leads to their detriment when the Tax Court finally grants the IRS motion for summary judgment.

To begin, there are some basics of court procedure that non-attorneys should realize they need to follow. They should show up in court for all hearings on their cases. If their case is scheduled for a calendar call, trial or any other special hearing, pro se petitioners should realize they need to show up. Participation in any legal hearing does not guarantee success, but it generally improves the judge’s opinion in the favor of those who appear unless the person is obnoxious.

Something else that should be obvious to unrepresented taxpayers is that they need to respond to court filings, especially the judge’s orders telling them to do so. By not responding to a judge’s orders, unrepresented taxpayers especially hurt their own cases.   It should be obvious to a taxpayer in Tax Court that doing something is often better than doing nothing.

One key piece a taxpayer should also realize is just what arguments are at issue. Collection Due Process (CDP) cases in Tax Court are one of the areas where taxpayers have problems. A CDP case in Tax Court concerns how the IRS treated the taxpayer. Were proper procedures followed? Did the taxpayer get his or her due process in treatment of the tax issue? A CDP hearing is not the place for the taxpayer to argue the merits of the tax at issue. Most likely, that ship has already boarded, sailed away, and docked at its port destination. Even though that is the case, there are still Tax Court petitioners trying to argue the merits of the tax at issue when they should be making arguments concerning due process.

This scratches the surface regarding complicated areas of court procedure. When it comes to hearsay or other trial arguments, taxpayers should be thinking about finding representation instead of making arguments without assistance.

The other area where taxpayers need to respond is regarding tax procedure. Ignorance of taxes will not serve people well in Tax Court. In looking at claims from child-related tax benefits to rental expenses, the common denominator is that the IRS requires substantiation for those claims.

I find it becomes necessary to be the middleman between my clients and IRS departments such as IRS Appeals or counsel. While my clients may have documentation regarding claims on their tax returns, I have found I need to translate communications from the IRS to the client and vice versa. It has also been necessary to organize documents so the IRS can review what the client has set aside. The IRS certainly does not like it when a taxpayer dumps unorganized documents in their lap as proof against the IRS audit. I went through the Tax Court process assisting a client who had boxes of documents. A current client has a suitcase of tax paperwork that needs to be organized for the IRS.

I think it is bizarre that taxpayers try to tackle areas of court and tax procedure when they are ignorant in those areas. I can understand that they want to save money, but they often ignore IRS notices about the LITC program. Several of them qualify for free assistance, but they choose to take on the IRS without any assistance at all. Why they do this makes no sense to me – they should at least call up the nearest LITC office to see what they have to say.

  1. Potential Solutions

A colleague (SueZanne Bishop) and I presented on “Gaining Independence Through Organized Financial Records” at the 2017 Kansas Conference on Poverty. While we did not have statistical data, we did have experiential learning to provide regarding the difficulties in working with clients to gather their financial data in areas of tax, family law, bankruptcy, estate planning and other areas of law. We spoke about the issues with handing an extensive form to clients to fill out regarding their assets, income, expenses or other financial data (such as IRS Form 433-A or forms used to expedite court filing). I also brought up how there may be additional steps involved in filling out a form, such as how the insolvency worksheet in IRS Publication 4681 needs financial information based on the date of a debt’s cancellation and not current financial information.

Some solutions we provided were giving clients more manageable chunks to a client (perhaps one page at a time) or regular meetings for each part of the form. I often talk through Form 433-F with clients rather than have them fill it out alone when I need that information in order to help them qualify based on their financial hardships for Currently Not Collectible status.

The theory behind our presentation was that helping clients to get organized now may give them assistance with greater problems in the future. Knowledge and the ability to budget would add to their skill sets. Organized data would reduce attentional strain (not dividing their focus between their finances and their children, for example). Adding this accomplishment might empower them to deal with the next problem and the next.

Often I think of how clients at legal aid organizations, LITCs, and other assistance programs would have difficulty dealing with their issues without the help we provide.

I do not know if the petitioner above, Mr. Kono, had any of the issues I mentioned. I wanted to provide alternative theories (not excuses) for why petitioners axre not as responsive as the IRS or the Tax Court would prefer. I know the IRS and the Tax Court try to educate taxpayers about the existence of the LITC program and I am dismayed why more do not ask for help. I also salute all pro bono volunteers who assist before and during Tax Court calendar calls.

Takeaway: I do not mean for this to be a blatant plug for the LITC and pro bono programs, but there is something to be said for those of us who act as the intermediaries between taxpayers and the IRS. The lack of IRS funding that in turn prevents quality customer service is but one of the barriers that taxpayers deal with so I wanted to provide another side of the story for the nonresponsive petitioners in these Tax Court cases. Potentially there is more to a petitioner’s story than laziness on why they did not do more in these cases.

 

 

Ninth Circuit Declines to Reach Constitutionality of President’s Removal Power Over Tax Court Judges

Frequent guest blogger Carl Smith brings us up to date on litigation over the constitutionality of IRC section 7443(f), giving the President removal power over Tax Court judges. Christine

In a post from September I alerted PT readers that two of the cases in which Joe DiRuzzo had again raised the issue of the constitutionality of the President’s removal power over Tax Court judges were set for oral argument before the Ninth Circuit. The constitutional separation of powers issue was decided against the taxpayers in both Kuretski v. Commissioner, 755 F.3d 929 (D.C. Cir. 2014), and Battat v. Commissioner, 148 T.C. No. 2 (2017) – though, on different reasoning as to which Branch of government in which the Tax Court is located, if any.

Well, the Ninth Circuit panel removed both of Joe’s cases from the oral argument calendar, and it just issued two unpublished opinions. In both of the opinions, the Ninth Circuit avoided addressing the constitutional question.

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In Thompson v. Commissioner, Ninth Cir. Docket No. 17-71027 (Nov. 14, 2018), Joe had moved to recuse all Tax Court judges because, in light of the President’s removal power, the judges were being subtlely pressured to rule in favor of the IRS. When the Tax Court denied the motion (citing Battat), Joe brought an interlocutory appeal. Consistent with the results of all other interlocutory appeals that Joe has brought on this issue to date, the Ninth Circuit refused to rule on the constitutional issue. Joe tried to fit this case into an exception from the rule that, ordinarily, interlocutory appeals are prohibited. However, the Ninth Circuit found that no exception applied. Nor did it think a writ of mandamus should issue. The court wrote: “The Thompsons do not explain how their challenge to the constitutionality of the Tax Court cannot be adequately reviewed or possibly corrected on direct appeal.”

In Crim v. Commissioner, Ninth Cir. Docket No. 17-72701 (Nov. 14, 2018), the taxpayer submitted an OIC, and, after it was not accepted, went to Appeals. Appeals confirmed the OIC denial. Despite the fact that the OIC was not part of a Collection Due Process (CDP) hearing, the taxpayer petitioned the Tax Court for review. In the case, Joe also moved for recusal of all Tax Court judges on the constitutional issue. Citing Battat, the Tax Court first denied the constitutional motion in an unpublished order. Then, the court issued a second unpublished order holding that, in the absence of a CDP proceeding, the Tax Court lacked jurisdiction to review Appeals’ denial of an OIC. Crim’s appeal to the Ninth Circuit was thus not an interlocutory one. However, it fared no better. The court did not reach the constitutional issue because it held that the Tax Court had properly dismissed the case for lack of jurisdiction. The Ninth Circuit wrote:

Because Crim has not presented any evidence that the IRS filed a notice of a federal tax lien or a final intent to levy against him, that he requested a collection due process hearing with the IRS Office of Appeals, that he attended an Office of Appeals collection due process hearing, or that the Office of Appeals made any “determination” addressing a disputed lien or levy, the Tax Court lacked jurisdiction over Crim’s petition under 26 U.S.C. § 6320 and § 6330. Any argument that Craig v. Commissioner, 119 T.C. 252 (2002), commands a different result has been forfeited. See Christian Legal Soc’y Chapter of Univ. of Cal. v. Wu, 626 F.3d 483, 487-88 (9th Cir. 2010). Crim also forfeited the arguments raised for the first time in his reply brief that the Administrative Procedures Act, 5 U.S.C. § 706(1), and the All Writs Act, 28 U.S.C. § 1651, provide jurisdiction here. The failure to find jurisdiction on these grounds was not plain error. . . .

Given that the Tax Court lacked jurisdiction over Crim’s petition, we decline to exercise our “discretionary jurisdiction” over the recusal motion. See Gruver v. Lesman Fisheries Inc., 489 F.3d 978, 981 n.4 (9th Cir. 2007).

To get the constitutional issue adjudicated, it looks like Joe or somebody else will have to appeal any Tax Court ruling on the constitutional issue after a final decision is entered in a Tax Court case over which the court clearly had jurisdiction.

Designated Orders: 10/15 – 10/19/2018 and Statistics from the Project’s First Year

Guest blogger Patrick Thomas of Notre Dame Law School brings us this week’s few designated orders. He then reviews the development of the Designated Order blogging project and reports the data that the team has gathered so far. There are some interesting statistics on Designated Orders that deserve some attention.

In related news, Paul Merrion at MLEX US Tax Watch recently wrote about (login required) the Tax Court’s new contract with Flexion, Inc. to develop a new electronic filing and case management system. The two-sentence announcement on the Tax Court’s homepage had escaped my notice. Paul’s article summarizes the request for proposals, which can be found here. While the Tax Court declined to comment on the article, this development may be a sign of greater openness to come. Christine

Designated Orders: 10/15 – 10/19/2018

The Tax Court issued only two designated orders during this week, both of which Judge Armen wrote. I will not discuss either in depth here. For posterity’s sake, Judge Armen upheld the Office of Appeals’ decision to sustain a levy in Cheshier v. Commissioner, a Collection Due Process case in which the Petitioner did not provide financial information or tax returns in the CDP hearing. In contrast, the second case, Levin v. Commissioner, involved a very responsive CDP petitioner. In Tax Court, the parties disagreed as to the financial analysis, the propriety of filing a NFTL after entering into an installment agreement, and the necessity of filing business tax returns. Alas, the Tax Court agreed with Respondent on all counts. The order from Judge Armen merely finalized Judge Ashford’s opinion in this case (T.C. Memo. 2018-172), which I would recommend for further reading.

The Designated Orders Project & Statistics

With such a light week, this provides an opportunity to take stock of our Designated Orders blogging project, which began in May 2017. Since then, Samantha Galvin, William (Bill) Schmidt, Caleb Smith, and I have tracked every order designated on the Tax Court’s website. As of October 30, 2018, there have been 623 designated orders—though many orders occur in consolidated cases, causing the number of “unique” orders to be substantially less at approximately 525.

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Why do we track these orders? First, the orders often deal with substantive issues of tax procedure. Some orders could very well be reported opinions. Many of these issues—especially those arising in CDP cases—receive comparatively less coverage in the Tax Court’s opinions. Indeed, through “designating” an order, the individual judge indicates that the order is more important than a routine order (of which the Tax Court issues hundreds each day). The orders can often reveal the direction in which an individual judge or the Court is tracking on certain issues.

Given the importance of the orders, one might surmise that the Tax Court’s website could filter the designated orders from those not designated. One would be mistaken. The Order Search tool on the website does not distinguish between designated and undesignated orders. (I am told, however, that internal users within the Tax Court can search and filter Orders by whether they were designated.)

Instead, orders are listed on the “Today’s Designated Orders” page each weekday after 3:30pm Eastern time (or, a message appears that no orders were designated on that day). At some unspecified time overnight, any record of these orders disappears. Of course, the underlying orders are themselves maintained within the dockets of their respective cases. But without knowing which orders were designated, it becomes impossible to discover them.

As an aside: no compelling reason exists to hide the designated status of an order from the public. Professor Lederman’s recent post nicely encapsulates the continuing (though progressively fewer) transparency concerns that the Tax Court faces. This certainly is another; yet the Court’s historic rationale for preventing disclosure of information (the valid concern with taxpayer privacy) simply does not apply here.

So, Caleb, Samantha, Bill, and I began tracking every order each weekday in May 2017. We have logged the date, docket number, petitioner, judge, and hyperlink for every designated order since then.

This summer, I cleaned and analyzed one year of designated orders data from April 15, 2017 until April 15, 2018. (I acknowledge help from Bill in initially looking at this data, along with substantial work from my research assistant, Chris Zhao). In addition to the above data, I added data regarding the jurisdictional type, whether the case was a small case under IRC § 7463, and whether the order merely transmitted a bench opinion under IRC § 7459(b). I present those initial findings below. In later work, I will compare the designated orders with opinions and “undesignated” orders (some of which are indeed just as substantive as designated orders, as Bob Kamman has routinely pointed out to us).

The dataset revealed 319 unique orders during the research period. In terms of content, we have not systemically tracked the subject matter of designated orders in our dataset. From our experience, the vast majority of orders deal with substantive, often tricky issues. The one major exception is found in Judge Jacobs’ orders, which are often routine scheduling orders. We are not sure why these orders are designated, presuming the purpose of designating an order is to highlight an important case or issue.

While we did not track individual issues, the dataset does contain a jurisdictional breakdown. Deficiency and CDP cases accounted for the vast majority of orders (51.10% and 37.30%, respectively). Other case types included partnership proceedings, whistleblower, standalone innocent spouse, retirement plan qualification review, 501(c)(3) status revocation, and others that involved multiple jurisdictional types.

12.85% of orders were for a small tax case under section 7463. Small cases are underrepresented, compared with the Court’s 37% share of such cases generally (as of April 30, 2018, according to Judge Carluzzo’s presentation to the ABA Tax Section’s Pro Bono and Tax Clinics Committee).

Certain judges used Designated Orders much more frequently than others during the period reviewed. Judges Gustafson, Holmes, and Carluzzo lead the pack, having issued 46.40% of all designated orders, at 21%, 13.17%, and 12.23%, respectively. Thirteen judges (a substantial minority of the 31 active judges) did not designate a single order during the research period. Almost half of the regular judges—Judges Foley, Goeke, Nega, Paris, Pugh, Thornton, and Vasquez—issued no designated orders at all. (The Chief Judge, given their increased administrative duties, receives fewer individual cases. Further, Judge Thornton did designate two orders during May and June 2018. Judges Goeke and Vasquez, while currently on senior status, are classified in the dataset as regular judges, as they retired on April 21 and June 24, 2018, respectively.) Over half of the senior judges issued no designated orders. All of the Special Trial Judges designated orders and did so frequently, accounting for 29.47% of all designated orders.

Judges have also used Designated Orders to highlight bench opinions with substantive tax issues. A bench opinion is one rendered orally at a trial session that disposes of the entire case. After the transcript is prepared, the judge then orders transmittal of the bench opinion to the parties under Rule 152(b). For an example, see Chief Special Trial Judge Carluzzo’s order in Garza v. Commissioner. These transmittal orders represent 8.46% of all designated orders.

Judge Carluzzo issued 11 such orders, followed closed by Judges Gustafson and Buch at 9 and 6 orders, respectively. Judges Carluzzo, Gustafson, and Holmes designated every order that transmitted a bench opinion, while Judge Buch had some undesignated bench opinions (there were 80 other undesignated bench opinions from other judges, which represent the vast majority).

Some cases are repeat players in designated orders. Twenty-nine dockets received more than one designated order during the research period. Three dockets received three or more orders, two of which were among the most well-known cases then before the Tax Court: Docket No. 18254-17L, Kestin v. Commissioner (three orders); Docket No. 31183-15, Coca-Cola Co. v. Commissioner (three orders); and Docket No. 17152-13, Estate of Michael Jackson v. Commissioner (seven orders).

From a timing perspective, the Court’s orders seem to peak in December and March and drop off in January and May—both for regular and S cases. I’ll leave it to those with access to better data to inform us whether this corresponds with the Tax Court’s overall production during these times.

What do these data tell us? I’ll venture a few broad conclusions and raise further questions:

  1. A substantial number of judges do not designate orders at all, or do so very seldom. Do these judges issue substantially more opinions? Are these judges’ workloads substantively different from those who do issue more designated orders?
  2. Three judges (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?
  3. Judges issued only 112 bench opinions during the research period. (To get this figure I searched for “152(b)” on the Order Search tool for each judge between April 15, 2017 and April 15, 2018.) This strikes me as minute compared with the overall number of cases (2,244 cases closed during April 2018 alone). Keith has long argued to increase the use of bench opinions to resolve cases; the Court appears to have disregarded his advice. Of the 112 bench opinions, only 26 (23%) were designated. Judges might consider designating these orders such that they highlight their bench opinions to the public.
  4. There is a large disparity in small cases on the docket (37% of all cases) with 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?

Ideally, the Tax Court would publish its own statistical analysis of its cases, orders, and opinions, as Professor Lederman suggests. Perhaps the Court can discuss and address some of my questions above in so doing. In addition, the Court should allow public users to filter orders on the Tax Court’s website by whether the orders were designated.

In the meantime, we will continue to track these orders so that practitioners and researchers alike keep abreast of important developments at the Court. We’ve learned a great deal about certain substantive topics through this project —especially about penalty approval under section 6751.

I further hope these statistics on designated orders shed some light on the Court’s sometimes opaque operations. Unless the Court, as it should, decides to take up the mantle itself, we’ll continue to track, summarize, and look at trends stemming from these orders.

Vested or Distributed Value, Post-Computation Procedures and a Lien in Limbo. Designated Orders, October 22-26

This week’s designated order post is brought to us by Professor Samantha Galvin from the University of Denver Sturm School of Law. The second order she describes involves one of those technical procedures on which it is easy to make a mistake. Here, the mistake is by respondent’s counsel but the fix is also easy. Keith

During the week of October 25, 2018 there were four orders designated. Three are discussed below. The only order not discussed (here) addresses a trial transcript that was incorrectly attached to a joint status report.

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Vested or Distributed Value

Docket 10488-10: Rui-Kang Zhang & Jua-Fei Chen v. C.I.R. (here)

First is the most substantive of the orders designated during my week. This case is about the value of life insurance policies that were distributed to petitioners in 2004. Petitioners and respondent agree the distribution created taxable income, but the amount is in dispute. The Court analyzes whether respondent is entitled to summary judgment as a matter of law.

Petitioners were shareholders and employees of an S corporation that had a benefit plan and trust agreement paid for by the corporation which provided life insurance for petitioners. The corporation took deductions for the cost of the two policies, which were owned by a non-exempt trust. The IRS began scrutinizing plans like this because they often consisted of multiple single-employer plans dressed up as a single multiple-employer plan and used to obtain tax advantages under sections 419 and 491A.

In the present case, petitioners’ corporation wound down its involvement in this plan in 2004 and petitioners were entitled to receive a share of the plan’s assets. The plan administrator transferred ownership of the life insurance policies from the plan’s trustee to the individual petitioners. Petitioners reported the plan’s fair market value at distribution as $160,000 (this is the net value after subtracting the policies’ surrender charges) and a severance cash distribution of $30,000, but the IRS argues that the total amount should be closer to $550,000.

Because the policies were owned by a non-exempt trust, section 402(b) is used to determine the value of the policies, but the statutory cross references are particularly important. Section 402(b)(1) governs the value of an employee’s rights to assets still held in trust at the time those rights become vested, and cross references section 83, which states the value is the fair market value of such property determined without regard to any lapse restrictions.

Whereas section 402(b)(2) governs the value of assets that are distributed and not still held in trust, and cross references section 72, which states the value is the “amount actually distributed.” This was defined in Schwab v. Commissioner, 136 T.C. 120 (2011), aff’d, 715 F.3d 1169, 1179 (9th Cir. 2013) as the fair market value of what was actually distributed (taking into account the taxpayer’s initial investment, insurance rates, and the dates covered after the distribution).

In other words, the amount included in petitioners’ table income should either be the vested value or the distributed value. Respondent argues that both sections of 402(b) should apply and petitioners should include the higher vested value as income, because once the corporation notified the plan of the withdrawal the petitioners became beneficial owners which created a vesting event that was later followed by a distribution event.

Court says this is counterintuitive because the same property cannot be both distributed and be owned by a trustee for the benefit of the person to whom it is distributed. Respondent’s logic would also make section 402(b)(2) superfluous because it would make all distributions of pension assets taxable in a two-step process: first, taxable as vested when the plan cuts the check (which make it transferable and not subject to a substantial risk of forfeiture) and then, taxable as distributed when the taxpayer actually receives the payment.

The Court identifies four relevant cases on this issue and determines that section 402(b)(2) should apply because the policies were distributed to and owned by the individual taxpayers. This means that the amount included in petitioners’ income should be the fair market value of what was actually distributed.

The Court denies respondent’s motion for summary judgment and order the parties to file a status report about whether the parties will settle or go to trial.

Post-Computation Procedures

Docket No. 14704-14: Damon R. Becnel v. CIR (here)

In this order the Court clarifies the proper procedure to be used when a petitioner is not responsive after the IRS submits computations. The Court released its opinion in this case but was waiting on the computations before it could enter the final decision. Petitioner has not approved the computations but it is unclear whether petitioner’s lack of approval is intentional, if he is simply nonresponsive, or if there is some misunderstanding.

Respondent moves for an entry of decision, but that is not actually the proper procedure to use in this situation. Computations are governed by Tax Court rule 155. Rule 155(b) states that when there is an absence of agreement between the parties the clerk will serve upon the opposite party a notice of the filing of computations and if the opposite party fails to object or submit alternative computations, then the Court may enter a decision in accordance with the computations already submitted.

In this case, the petitioner was never given notice so the Court recharacterizes IRS’s motion, orders the clerk to serve the petitioner with notice, and will enter a decision in accordance to the computations if petitioner fails to respond.

A Lien in Limbo

Docket: 681-18L, Douglas C. Hendriks v. CIR (here)

Next the Court evaluates the undisputed facts to determine whether to grant respondent’s motion for summary judgment in a collection due process case.

The petitioner filed two CDP hearing requests one in response to an intent to levy, and another in response to the intent to file a notice of federal tax lien. The IRS only responded to and issued a notice of determination for the levy CDP request, but did not respond to nor issue a notice of determination on the lien filing.

The Court finds that the lack of information about the lien CDP request is a genuine issue of material fact that could result in a remand to appeals. As a result, summary judgment is not appropriate under these circumstances and the Court denies respondent’s motion.