Five Things to Know About FedEx and the Tax Court

Today Bob Kamman explores FedEx issues in Tax Court and brings us several interesting findings. The bottom line for practitioners (as always) is to be aware of the jurisdictional perils that await those who cut it close without carefully checking the list of designated private delivery services. Christine

Inspired by Keith Fogg’s post about the Tax Court petition that could not be delivered by FedEx during the January 2019 government shutdown, I searched recent Tax Court orders for similar cases. Here are five things I learned.

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1) You can’t always trust word searches on the Tax Court website.

I searched for orders with the word “FedEx” from October 1, 2018 through May 28, 2019.  The search returned three hits.  Then I searched for “FedEx” from April 30, 2019 through May 28, 2019.  That search returned ten hits.  So I searched for “FedEx” from only November 1 through December 31, 2018.  That search returned five hits, none of which were in my first search.

My conclusion, or at least hypothesis, is that the search “times out” after a certain number of orders are searched.  Results will be more accurate if done by month, rather than for longer periods. 

2) The case described in Keith’s post is not unique.

In the Awad case, in response to an earlier order the Court writes

The petition, filed January 30, 2019, arrived at the Court in an envelope with a FedEx ship date of January 29, 2019. . . . petitioners indicated that the petition was originally mailed to the Tax Court on January 16, 2019, (2) petitioners provided respondent a copy of the envelope in which the petition was originally sent to the Tax Court on January 16, 2019, a copy of which was attached to the Response, and (3) petitioners also provided respondent a copy of the envelope in which the petition was returned to them, a copy of which was attached to the Response.

It is not clear whether the first attempt was through the U.S. Postal Service, or through FedEx.

And then there is the unfortunate petitioner in Chicas, whose deadline for filing was December 31, 2018 – a date the government was closed.  He used UPS Ground to send his petition on January 3, 2019.  It was returned by UPS, and he sent it again by UPS Ground on February 22, 2019.  He was late the first time, and UPS Ground is not an acceptable service anyway. 

3) IRS does not always question jurisdiction.  Sometimes it needs help from the Tax Court.

That is what happened in Powerhouse Mortgage Corporation.  In dismissing the case on November 29, 2018,  Judge Foley explained,

Attached to the petition was a notice of determination concerning collection action dated July 17, 2018 . . .The petition had been received by the Court in an envelope sent by FedEx Express Standard Overnight and bearing a ship date of August 17, 2018. An answer to the petition followed on October 9, 2018, but did not address jurisdictional matters. Nonetheless, because review of the record suggested a fundamental jurisdictional defect, the Court by Order dated October 12, 2018, directed the parties, on or before November 2, 2018, to show cause in writing why this case should not be dismissed for lack of jurisdiction, . . .Shortly thereafter and in lieu of a response, respondent on October 17, 2018, filed a Motion To Dismiss for Lack of Jurisdiction on the identical ground of an untimely petition.. . .petitioner was afforded additional time, until November 9, 2018, to object to respondent’s motion as well. 

The petitioner did not respond, and the motion to dismiss was granted.

See also Jones, dismissed by Judge Foley on December 3, 2018.  IRS didn’t notice that the petitioners not only were late, but used the wrong FedEx service.  However, the Court did:

The petition in the above-docketed proceeding was filed on September 4, 2018. Therein, petitioners alleged dispute with a notice of deficiency dated June 1, 2018, issued with respect to the 2015 and 2016 taxable years. The petition had been received by the Court in an envelope sent by FedEx Express Saver and bearing a ship date of September 1, 2018. Unexpectedly, respondent thereafter on September 21, 2018, filed an answer to the petition, not addressing the matter of timeliness.

Nonetheless, because review of the record continued to suggest a fundamental jurisdictional defect, the Court at that juncture issued an Order To Show Cause dated October 24, 2018, directing the parties to show cause in writing why this case should not be dismissed for lack of jurisdiction, on the ground that the petition was not filed within the time prescribed by section 6213(a) or 7502. . . . In particular, the Order To Show Cause noted, first, that the date of the notice of deficiency underlying this proceeding indicated a statutory deadline for filing a petition pursuant to section 6213(a) . . .that expired on August 30, 2018, and, second, that FedEx Express Saver is not a designated private delivery service for purposes of the section 7502 . . . timely mailing provisions.

Substantially the same facts have also led Judge Foley to request both parties in Rodriguez to explain by June 11 why the case should not be dismissed when FedEx Express Saver was used and the petition was not received by the required date.  This May 22, 2019 order is somewhat confusing because it states the FedEx envelope “reflects a ship date of August 25, 2019.

I am sure that will be cleared up in later proceedings.  Maybe it was just another FedEx mistake, as happened in Muramota.  In that case, the petition was “in an envelope indicating that the petition was received and processed by FedEx on May 15, 2018, for delivery by FedEx 2-day mail.”  But when Judge Thornton questioned jurisdiction, because the last date to petition was May 14, 2018, “the parties are in agreement that the petition was delivered to FedEx on May 14, 2018, as evidenced by a receipt provided by petitioners’ counsel, and the petition was therefore timely mailed.”  A stipulated decision was entered the same day.

4) Petitioners continue to use FedEx services that do not qualify for “timely mailed” recognition.

Judge Foley’s four-page order of February 25, 2019,  dismissing the Thompson case explains why FedEx Express Saver service is not a qualified “private delivery service.”  The petitioners had noted that they followed the instructions on the second page of their Notice of Deficiency, which apparently did not explain “private delivery service” limitations.  I looked at a couple Notices of Deficiency from 2018 and did not find a reference to private delivery services on them. 

Similar language was used by Judge Foley in his four-page order of February 4, 2019, dismissing Griffiths.

5) The Tax Court uses FedEx also.

When it absolutely positively has to get there faster than the Postal Service can deliver, or when there may be other benefits, the Tax Court uses FedEx to contact Petitioners.  (It probably gets a discounted government rate.)  

For example, in McPhee,  “On May 7, 2019, the Court was informed of an unsuccessful delivery attempt by FedEx of the Notice of Change of Beginning Date of Session, served on petitioners on May 1, 2019. Petitioners subsequently advised the Court that their address has changed. . . .”

Capacity to File a Tax Court Petition

At issue in Timbron Holdings Corporation and Timbron International Corporation v. Commissioner, T.C. Memo 2019-31, is whether a corporation can file a Tax Court petition when its corporate charter has lapsed. The Tax Court holds that it cannot and that reviving the charter after the filing of the petition does not save the Tax Court case. The non-precedential opinion reminds us of the importance of corporate formalities when seeking to litigate regarding corporate tax liabilities.

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On March 2, 2009, and August 1, 2013, respectively, the California Franchise Tax Board suspended Timbron International’s and Timbron Holdings’ powers, rights, and privileges for failure to pay State taxes. Petitioners’ powers, rights, and privileges remained suspended as of July 6, 2017. The suspension of corporate powers provides another example of the types of state benefits that taxpayers can lose by not paying state taxes. I had not previously seen this exercise of power by a state but I do not represent corporations. The suspension must happen routinely in California with potentially far sweeping results including those at issue here. This means that corporations that fall behind in paying their state taxes will have difficulty in many contexts. It also could have significant consequences for the responsible persons of the corporations. This post will not discuss the broader issues.

The court notes that as of July 6, 2017, the powers remained suspended. The suspension of the corporate powers, of course, does not stop the IRS from auditing the corporation and from issuing a notice of deficiency. The IRS did issue the notice on July 14, 2016. The corporations responded by filing Tax Court petitions on October 11, 2016 which respondent answered the following month. In the answer the IRS did not raise the jurisdictional issue but such issues can be raised at any time. Several months later the IRS must have noticed the suspended powers and the fact the suspension existed at the time of the filing of the petitions and it filed motions to dismiss for lack of jurisdiction due to the lapse of corporate existence at the time of the filing of the petitions. In response the corporations did not argue with the fact of the suspension but argued that at the time of the filing of the petition “that they had obtained certificates of reviver and were considered ‘active’ as of September 27, 2017 (approximately 11 months after the end of the applicable period).”

The court set up the issue with the following statement:

Whether we have jurisdiction to decide a matter is an issue that a party, or this or an appellate court sua sponte, may raise at any time. David Dung Le, M.D., Inc. v. Commissioner, 114 T.C. 268, 269 (2000), aff’d, 22 F. App’x 837 (9th Cir. 2001). Jurisdiction must be shown affirmatively, and petitioners bear the burden of proving all facts necessary to establish jurisdiction in this Court. Id. at 270. Petitioners must establish that: (1) respondent issued them valid notices of deficiency and (2) they, or someone authorized to act on their behalf, filed timely petitions with the Court. See Rule 13(a), (c); Monge v. Commissioner, 93 T.C. 22, 27 (1989); see also secs. 6212 and 6213.

The court noted that corporate petitioners must have capacity to file a petition in order to for the court to have jurisdiction. (For a good discussion of the Timbron case commenting on Tax Court Rule 60(a), see Bryan Camp’s blog post here.) It then looks to California law to determine what it means to have the corporate powers suspended. The IRS relied on the case of David Dung Le, M.D., Inc. v. Commissioner, 114 T.C. 268, 269 (2000), aff’d, 22 F.App. 837 (9th Cir. 2001). In that case the Tax Court interpreted California law in a very similar situation and determined that “[i]n reaching our holding we cited Cal. Rev. & Tax. Code secs. 23301 and 23302 (West 1992 & Supp. 1999), noting that the Supreme Court of California has construed those sections to mean that a corporation may not prosecute or defend an action during the period in which it is suspended.”

Petitioners argued that even though the state suspended its powers it still retained some rights and that those residual rights gave it capacity to file the Tax Court petition. They pointed to cases in California courts brought by suspended corporations which were allowed to proceed after the lifting of the suspension. The Tax Court rejected this argument pointing to its long history on this issue and discussing the fact that a post-petition restoration of rights did not revive a petition filed at the time corporate powers were suspended, for a court with limited jurisdiction. In this way it differentiated itself from the courts of general jurisdiction in California to which petitioners had cited.

Petitioners also argued that the 90-day period for filing a petition after the issuance of a notice of deficiency was not a jurisdictional time period. Since that period for filing a petition is not jurisdictional, petitions argued that the period could remain open until the restoration of corporate powers. The court dismissed this argument in a footnote citing to the Guralnik case in which the Tax Court, in a 16-0 reviewed opinion, rejected similar arguments concerning its jurisdiction raised by the tax clinic at Harvard. This is an issue we have discussed repeatedly in the blog though not in the context of lapsed corporate powers and not with an 11-month time frame to equitably toll.

The outcome here comes as no surprise. A host of cases have reached similar results including the almost identical case of David Dung Le. States regularly suspend corporations for failure to pay the annual registration fees. As states find more ways to suspend corporate powers, corporations must pay careful attention to their status at the time of filing the Tax Court petition. Chief Counsel, IRS will pay attention to this issue since it presents an easy way to dispose of a case. Then a corporation already in financial trouble will only have the opportunity to contest the IRS determination if it can come up with full payment of the liability in order to meet the Flora rule.

Fallout from the Shutdown – The Odyssey of a Tax Court Petition

I think we all expected that the length of the shutdown would create some interesting procedural issues. At the recent ABA Tax Section meeting Rich Goldman from Procedure & Administration in Chief Counsel’s office reported on an interesting case that arose because of the shutdown. In the end the taxpayers will get their day in court but their visit to the Tax Court got off to a rocky start.

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The case is Hackash v. Commissioner, Dk. No. 2406-19S. Mr. and Mrs. Hackash received a statutory notice of deficiency (SNOD) on October 22, 2018. They sent a petition to the Tax Court on January 16, 2019 via FedEx using one of the FedEx services designated by the IRS. At the time they sent their petition to the Tax Court, it was closed. FedEx attempted delivery several times (January 17, 18 and 22); I guess the delivery person was not reading the news about the shutdown. Each time the delivery person showed up there was no answer at the Tax Court.

The story told by Rich at the ABA diverges a bit from the Court’s order determining that it had jurisdiction. The order says that after the last failed attempt FedEx attempted to return the petition to petitioners. Rich said that FedEx took the petition to a location in Mississippi. Meanwhile, the Court resumed operations on January 28, 2019 at the end of the shutdown. According to Rich, someone in Mississippi noticed that they had a package destined for the Tax Court and shipped the package back up to D.C. where it was delivered to the Court on February 1, 2019. In shipping the package from Mississippi to D.C., FedEx used one of its lowest delivery services which has not made it onto the IRS list of approved services.

When the package arrived at the Court on February 1, more than 90 days had run since the sending of the SNOD. Because the package arrived at the Court via an unapproved delivery service and because it arrived well after the 90th day, the Court issued an order to show cause why the case should not be dismissed as untimely.

Petitioners were able to show the Court that they did timely mail the petition and show the various attempts by FedEx to deliver the package during the shutdown. Rich noted that they had kept their receipt from the original mailing. Based on the timely mailing of the petition in the first instance and the mailing by an authorized third party, the Court determined that it did have jurisdiction, stating:

I.R.C. section 7502(f) governs the treatment of private delivery services under section 7502. It provides that the sending of a petition by a designated private delivery service may be treated as timely mailed. In Notice 2016-30, 2016- 18 I.R.B. 676,2 the Commissioner includes FedEx Standard Overnight among designated private delivery services. See I.R.C. sec. 7502(f)(2); sec. 301.7502-1(c)(3), Proced. & Admin. Regs. As respondent further notes, Notice 2016-30 further provides that, under section 7502(f)(1), the date recorded by FedEx to its electronic data base or the date marked by FedEx on the cover of the item is treated as the postmark for purposes of section 7502. Accordingly, the Court concludes and agrees with the parties that the petition in this case was timely mailed/timely filed with the Court.

So, the taxpayers have a happy ending and we get a story from one of the problems created by the shutdown. I am sure this is not the only problem. Here, the taxpayers were diligent in responding to the Court’s order, they had used an authorized delivery service to initiate the mailing to the Court, and they had kept proof of mailing. I hope that they have an outcome on the merits equal to their outcome on the jurisdictional issue. I also wonder how many private delivery servers stood at the Tax Court’s doors during the shutdown waiting for someone to answer.

AJAC and the APA, Designated Orders 4/8/2019 – 4/12/19

Did the Appeals’ Judicial Approach and Culture (AJAC) Project turn conversations with Appeals into adjudications governed by the Administrative Procedure Act (APA) and subject to judicial review by the Tax Court? A petitioner in a designated order during the week of April 8, 2019 (Docket No. 18021-13, EZ Lube v. CIR (order here)) thinks so and Tax Court finds itself addressing its relationship with the APA yet again.

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I spent time reviewing the history of the APA’s relationship with the IRS as well as the somewhat recent Tax Court cases that have addressed it (including Ax and Altera). The argument put forth by petitioner in this designated order appears to be novel – but ultimately the Tax Court’s response is similar to its holding in Ax, with perhaps even more insistence on the Tax Court’s jurisdictional limitations.  

Most recently, the Ninth Circuit withdrew its decision in the appeal of Altera, and we wait to see if it decides again to overturn the Tax Court’s decision which held that the IRS violated the APA when issuing regulations under section 482. For the most recent PT update on the case, see Stu Bassin’s post here.

The case in which this order was designated is also appealable to the Ninth Circuit. Is petitioner teeing up another APA argument before the Ninth Circuit depending on what happens in Altera? That’s a stretch – since petitioner is asking the Court to treat a phone call with Appeals as a adjudication – but it is possible that something more is going on than what is conveyed in the order.

First, let me provide some background: Petitioner is an LLC taxed as TEFRA partnership; it filed bankruptcy in 2008 but then reorganized. Part of the reorganization involved the conversion of debt that Goldman Sachs (or entities controlled by it) had in the old partnership into a controlling equity interest in the new partnership.  After the reorganization, the partnership filed tax returns taking the position that the partnership was terminated on the date of the reorganization because more than 50% of the partnership interests had been ousted through what was in substance a foreclosure of the old partners’ interests. Accordingly, the old partners treated the reorganization as a deemed sale of their property and reported $22 million in gain.

Then, in 2011, reorganized EZ Lube filed an Administrative Adjustment Request (AAR) taking a position contrary to the former partners’ previously filed returns. The position taken in the AAR was that the partnership was not technically terminated, and instead the exchange of debt for equity created $80 million in cancelled debt income.

The IRS agreed with the AAR and issued a final partnership administrative adjustment (FPAA) reflecting that the partners’ originally filed returns were wrong. But one of the former partners liked the old characterization so in response to the FPAA, he petitioned the Tax Court.

In due course the case was assigned to Appeals and this is where things start to get messy. The Appeals officer stated, over the phone, that she agreed with the former partner. In other words, that the FPAA should be conceded. The Appeals Officer’s manager concurred but explained that they would need to consult with Appeals National Office before the agreement could be conveyed in a TEFRA settlement.  Appeals National Office did not agree with the Appeals Officer’s position, so the case did not settle.

Petitioner argues that the phone conversation with the Appeals Officer was a determination and should end the case. The basis for petitioner’s argument is that the IRS’s Appeals Judicial Approach and Culture initiative transformed Appeals to a quasi-judicial part of the IRS which listens to each side and then issues a decision (like a court) instead of negotiating settlements to end litigation.

The IRS does not dispute that the phone call occurred, nor does it dispute the substance of what the Appeals Officer said, but it does dispute that the phone call was a determination. The IRS acknowledges that AJAC may have changed how Appeals processes cases, but maintains it did not set up a system of informal agency adjudication followed by judicial review as those terms are commonly used in administrative law.  

The Court tasks itself to answer the only question it sees fit for summary judgment, which is: what is the proper characterization of what the Appeals officer said?

The Court can decide, as it has in other cases, whether the parties actually reached a settlement by applying contract law and by making any subsidiary findings of fact. But petitioner argues that the call was not a settlement, it was a determination and the Court has jurisdiction to review such determinations.

This is where the Court insists on its jurisdictional limitations and goes on to review all the different code sections that grant it jurisdiction. It does not find anything in the Code that allows it to review determinations by Appeals in TEFRA, or deficiency, cases.

The petitioner agrees that nothing in the Code provides the Court with jurisdiction to review Appeals determinations in deficiency cases. Instead petitioner argues that the default rules of the APA give the Court jurisdiction, because the Appeals Officer was the presiding agency employee and she had the authority to make a recommended or initial decision as prescribed by 5 U.S.C. 554 and 557, and the Appeals Officer’s decision is subject to judicial review under 5 U.S.C. 702.

This is where the Tax Court revisits some of the arguments made in Ax – that the Internal Revenue Code assigns Tax Court jurisdiction. This arrangement is permissible under what the APA calls “special statutory review proceedings” under 5 U.S.C. 703. See Les’s post here and Stephanie Hoffer and Christopher J. Walker’s post here for more information.

If petitioner seeks review under default rules of the APA, the Court’s scope of review would be limited to the administrative record with an abuse of discretion standard. This creates two different standards for TEFRA cases, and the Court finds this impossible to reconcile.

The reality is that when a petitioner is unhappy with a decision made by Appeals in a docketed case, they can bring the case before the Court. It seems as though petitioner in this case is trying to treat a decision made by the Appeals Officer assigned to the case as something different than a decision made by Appeals National Office – but a decision has not been rendered until a decision document is issued and executed by both parties. The Court points out that phone calls can be a relevant fact in determining whether the parties have reached a settlement, but it doesn’t mean the Court has the jurisdiction to review phone calls. Petitioner says phone call itself is of jurisdictional importance, but if that’s the case, it is the District Court, not the Tax Court, that is the appropriate venue to review it.

Is this a situation where petitioner is unhappy because there was a glimmer of hope that the case would go his way which was ultimately destroyed by the National office? Or is something more going on here?  AJAC is called a project and caused changes to the IRM. It’s not a regulation or even guidance provided to taxpayers – rather it is a policy for IRS employees to follow and seems to be a permissible process and within the agency’s discretion to use. But it’s not even AJAC itself that petitioner seems to have a problem with, instead petitioner’s problem lies with the difference between the appeals officer’s position and the National Office’s position on the case.

The Court denies petitioner’s summary judgment motion and orders the parties to file a status report to identify any remaining issues and explain whether a trial will be necessary.

Other Orders Designated

There were no designated orders during the week of April 1, which is why there is no April post from Patrick. The Court seemingly got caught up during the following week and there were nine other orders designated during my week. In my opinion, they were less notable, but I’ve briefly summarized them here:

  • Docket No. 20237-16, Leon Max v. CIR (order here): the Court reviews the sufficiency of petitioner’s answers and objections on certain requests for admissions in a qualified research expenditure case.
  • Docket No. 24493-18, James H. Figueroa v. CIR (order here): the Court grants respondent’s motion to dismiss a pro se petitioner for failure to state a claim upon which relief can be granted.
  • Docket No. 5956-18, Rhonda Howard v. CIR (order here): the Court grants a motion to dismiss for failure to prosecute in a case with a nonresponsive petitioner.
  • Docket No. 12097-16, Trilogy, Inc & Subsidiaries v. CIR (order here): the Court grants petitioner’s motion in part to review the sufficiency of IRS’s responses to eight requests for admissions.
  • Docket No. 1092-18S, Pedro Manzueta v. CIR (order here): this is a bench opinion disallowing overstated schedule C deductions, dependency exemptions, the earned income credit, and the child tax credit.
  • Docket No. 13275-18S, Anthony S. Ventura & Suzanne M. Ventura v. CIR (order here): the Court grants a motion to dismiss for lack of jurisdiction due to a petition filed after 90 days.
  • Docket No. 14213-18L, Mohamed A. Hadid v. CIR (order here): a bench opinion finding no abuse of discretion and sustaining a levy in a case where the taxpayer proposed $30K/month installment agreement on condition that an NFTL not be filed, but the financial forms did not demonstrate that petitioner had the ability to pay that amount each month.
  • Docket No. 5323-18L, Percy Young v. CIR (order here): the Court grants respondent’s motion to dismiss in a CDP case where petitioner did not provide any information.
  • Docket No. 5323-18L, Ruben T. Varela v. CIR (order here): the Court denies petitioner’s motion for leave to file second amended petition.

Undesignated Orders: All in a Day’s Work for a Tax Court Judge

Today frequent guest blogger Bob Kamman takes us through a day in the life of a Tax Court judge, as viewed through the non-designated orders that occupy much of the Court’s day-to-day time. Christine

Much can be learned from the Designated Orders selected by Tax Court judges as noteworthy among the hundreds of orders issued each day. But sometimes we may learn just as much from those that are not designated. For examples, let’s shadow Judge David Gustafson for one day, as he works through his in-box to move cases along.

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These are all lessons from May 2, 2019. They include:

  1. A taxpayer (Augustine) hopes to get help from a Low-Income Taxpayer Clinic.
  2. A taxpayer (Pendse) wants a trial later this month because she will be out of the country for more than a year.
  3. Taxpayers (Emanouil) whose co-counsel wants to withdraw, but forgets to sign the motion.
  4. A taxpayer (Miruru) whose case was dismissed with tax deficiency upheld after failure to appear at trial and to respond to an IRS motion.
  5. A taxpayer (Baba) gets a second chance from IRS Appeals but has not confirmed he wants it.
  6. Taxpayers (Reuter and Stovall) have not returned proposed decision documents to IRS after a settlement seems to have been reached.
  7. A partnership (Cross Refined Coal) in whose case IRS has filed a motion to compel.
  8. A taxpayer (Insinga) in a 2013 whistleblower case, whose latest filing needs to be sealed without redactions.
  9. Taxpayers (Houchin) whose 2013 case will be continued again, as they and IRS requested, but not on Judge Gustafson’s calendar. (The docket shows a bankruptcy filing.)
  10. Taxpayers in two cases (Lugo, and Abdu-Shahid) in which IRS Counsel misfiled documents.

Darline Augustine, Docket 12248-18

Pro Se, New York

The Commissioner filed a motion for summary judgment (Doc. 7) in this “collection due process” (“CDP”) case. We ordered petitioner Darline Augustine to file a response by March 1, 2019, and we did our best to explain the nature of the IRS’s motion and what she should state in a response. (See Doc. 9.)

Ms. Augustine requested more time to submit her response (see Doc. 13), so we gave her until April 15, 2019 (see Doc. 14). On that date she filed a one sentence letter (Doc. 15) that did not respond substantively to the motion. By order of April 22, 2019 (Doc. 17), we allowed her to file a supplemental response by no later than May 6, 2019. On April 29, 2019, we received from Ms. Augustine another letter (Doc. 18), which informed us that she is getting the help of a Low Income Tax Clinic, and which states: “With regard to the reply to the summary judgment, I will have to get assistance from a low income legal service. I am not an attorney and legal language is quite opaque to me.” No attorney from an LITC has filed an entry of appearance in this case.

Ms. Augustine’s letters have asserted that she wants to appear before the Tax Court. Trials are conducted, however, to resolve disputes of fact. If there are no material facts that are disputed, then there is no need for a trial. The Commissioner’s motion purports to show that no trial is needed in this case because (the motion says) the undisputed facts show that the IRS is entitled to prevail. To preserve her opportunity for a trial, Ms. Augustine must show why we should not grant the Commissioner’s motion. We will give her one more opportunity to do so. It is

ORDERED that, no later than June 3, 2019, Ms. Augustine shall file any supplemental response to the Commissioner’s motion that she wishes to file. If she intends to obtain the assistance of an LITC, then she will need to obtain it in time to meet that deadline. In the absence of the entry of an appearance by an attorney representing Ms. Augustine, we would not expect to grant her any further extension of this deadline. It is further

ORDERED that, no later than June 24, 2019, the Commissioner shall file a reply to Ms. Augustine’s supplemental response, if she files one; or, if she does not file a supplemental response, then the Commissioner shall file a status report so stating.

Shona Pendse, Docket 25665-17

(Pro Se, Boston before taxpayer relocated)

Now before the Court is petitioner’s motion to calendar this case for trial this month. We will deny the motion.

This case was scheduled to be tried at a Boston session of this Court on April 1, 2019, but at the joint request of the parties, it was continued. The place of trial was changed to Washington, D.C., and the case was thereafter scheduled to be tried at a trial session beginning September 16, 2019. Petitioner wants a more prompt trial, and she says that she must be out of the country from June 2019 through August 2020. She therefore requested that the case be set for trial at a special trial session in Washington beginning May 21, 2019, at which the undersigned judge will coincidentally be presiding. Respondent objects. Counsel states that he received information from petitioner in April that prompted an inquiry by which he learned of a related refund case that is pending in U.S. district court, that involves a different taxpayer, and that is being handled by the U.S. Department of Justice. Counsel states that it is necessary to coordinate the two cases and that he cannot be ready for trial in this case in May 2019. Petitioner does not dispute the relatedness of the cases but maintains that respondent should have known about the related case already and should now be ready to proceed.

Even if we were otherwise inclined to grant petitioner’s motion, it might not be practical to try to fit this case into the special trial session beginning May 21, 2019. A special trial session is set based upon the anticipated situation and needs of the case being scheduled, and in this instance the other case set for that session is likely to use all of the available time in that session. Moreover, respondent’s counsel’s expressed need to coordinate this case with the refund case is plausible, and while perfect coordination of information between Chief Counsel and the various units of the IRS–and between Chief Counsel and the Department of Justice–might bring efficiencies, it would do so at a sometimes great cost, so we do not fault Chief Counsel nor his client agency for counsel’s unawareness of the related case before petitioner disclosed it to him.

Because we will deny the motion to calendar, this case remains on the calendar for the regular trial session in Washington, D.C., beginning September 16, 2019. However, we do not overlook petitioner’s scheduling difficulty with that trial session, and this order is without prejudice to any motion petitioner might make to continue this case from that trial session. We would consider any such motion on its merits. It is

ORDERED that petitioner’s motion to calendar is denied.

Peter C. & Pascale Emanouil, Docket 5089-17

(2-Day Trial in Boston, October 2018)

On April 25, 2019, an unopposed motion to withdraw as counsel of record was filed on behalf of Nicholas F. Casolaro. The motion states that co-counsel Richard M. Stone and Peter D. Anderson will continue as counsel for petitioners in this case. That motion, however, was not signed by Mr. Casolaro in compliance with Tax Court Rule 24(c), which requires that counsel seeking to withdraw his appearance must file a motion with the Court requesting leave to do so. It is therefore

ORDERED that, no later than May 7, 2019, counsel for petitioners shall file an amendment to the unopposed motion to withdraw bearing the signature of Mr. Casolaro in compliance with Rule 24(c).

Mbugua J. Miruru, Docket 25168-17

(New Hampshire, Pro Se)

When this case was called from the calendar for the Court’s March 11, 2019, Boston, Massachusetts, trial session, there was no appearance by or on behalf of petitioner Mbugua J. Miruru. Counsel for the Commissioner appeared and filed a motion to dismiss for lack of prosecution. In that motion, the Commissioner moves the Court to enter a decision with respect to Mr. Miruru in the amount for the tax year 2015 set forth therein. By order dated March 11, 2019 (served March 18, 2019), the Court directed Mr. Miruru to file a response to the Commissioner’s motion to dismiss on or before April 10, 2019. As of this date, the Court has received no response from Mr. Miruru. It is therefore

ORDERED that in addition to regular service, the Clerk of the Court shall serve a copy of this Order of Dismissal and Decision on Mr. Miruru at the additional address (in Bristol, New Hampshire) that appears on the certificate of service attached to the Commissioner’s motion. It is further

ORDERED that the Commissioner’s motion to dismiss for lack of prosecution is granted, and this case is dismissed for lack of prosecution. It is further

ORDERED AND DECIDED that there is a deficiency in income tax due from petitioner Mbugua J. Miruru for the tax year 2015 in the amount of $4,538.

Abu Baba, Docket 13186-18

(Virginia, Pro Se)

On April 26, 2019, the Commissioner filed two motions: (1) a motion for continuance [i.e., for a postponement] of the trial of this case, and (2) a motion for remand, in which it asks the Court to remand the case to the IRS’s Office of Appeals for further consideration. A continuance and remand would be welcome to many petitioners in a case such as this one, but the motions state that the Commissioner does not know whether petitioner Abu Baba objects to the motions. It is therefore

ORDERED that, no later than May 14, 2019, Mr. Baba shall file with the Court and serve on the Commissioner a response to the Commissioner’s two motions filed April 26, 2019.

Janet Ann Reuter & David Stovall, Docket 15641-17

(New York, Pro Se)

On May 1, 2019, the Commissioner filed a motion for entry of decision. The motion alleges that the parties have reached a basis of settlement and that counsel for the Commissioner sent to petitioners a proposed decision document effectuating that settlement, but indicates that petitioners have failed to return the decision document to counsel for the Commissioner. It is therefore

ORDERED that, if petitioners objects to the Commissioner’s motion for entry of decision, then on or before May 15, 2019, petitioners shall file with the Court and serve on the Commissioner a response to the motion, explaining why that motion should not be granted and a decision entered in this case.

Cross Refined Coal, LLC, Docket 19502-17

(Counsel for Both Parties in Chicago; Boston Trial Request)

On April 26, 2019, respondent filed a motion to compel (Doc. 50). It is

ORDERED that petitioner shall file a response by May 10, 2019, and that respondent shall file a reply by May 23, 2019.

Robert J. & Linda C. Houchin, Docket 27654-13

(Nevada; Counsel for Both Parties and Trial in Los Angeles)

In accordance with the parties’ joint recommendation in their status report filed April 29, 2019, it is

ORDERED that the undersigned judge no longer retains jurisdiction over this case and that this case is continued generally.

Joseph A. Insinga, Docket. 9011-13W

(New Jersey; Washington DC Trial)

(Petitioner Counsel in Memphis; IRS Counsel in Detroit)

 On April 26, 2019, petitioner filed a first amended reference list of redacted information (Doc. # 258). It is therefore

ORDERED petitioner’s first amended reference list of redacted information (Doc. 258), is sealed. It is further

ORDERED that the Clerk of the Court shall remove from the Court’s public record the first amended reference list of redacted information (Doc. 258), and that these documents shall be retained by the Court in a sealed file which shall not be inspected by any person or entity except by an Order of the Court.

Wanda M. Lugo, Docket 15028-18

(New York; Pro Se)

On May 1, 2019, the Commissioner mis-filed in this case a motion for extension of time (Doc. 10) that was obviously intended to be filed in another case. It is therefore

ORDERED that the Commissioner’s motion filed May 1, 2019 (Doc. 10), is stricken from the Court’s record in this case and shall not be viewable as part of this case.

Abdu-Shahid May, Docket 11654-18

(New York; Pro Se)

On May 1, 2019, the Commissioner mis-filed in this case a motion for extension of time (Doc. 12) that was obviously intended to be filed in another case. It is therefore

ORDERED that the Commissioner’s motion filed May 1, 2019 (Doc. 12), is stricken from the Court’s record in this case and shall not be viewable as part of this case.

What sort of day was it? “A day like all days, filled with those events that alter and illuminate our times… all things are as they were then, and you were there.” (If you were not a television viewer before 1972, you may not recognize that quotation from Walter Cronkite.) As this review demonstrates, a Tax Court judge in just one day may make a wide range of decisions –- for individuals and businesses disputing large amounts of tax and small ones; in collection due process matters; and even in whistleblower cases. Most of this work will not be found in published opinions and designated orders. What all of the cases have in common, though, is that each is the most important one before the Court, for the petitioner (and counsel, if any) involved.

TBOR Provides no Relief in Tax Court Deficiency Proceeding

In Moya v. Commissioner, 152 T.C. No. 11 (2019) the Tax Court rejected petitioner’s argument that she could obtain relief in a deficiency case based on her assertion that the IRS had violated her TBOR rights. The precedential opinion cites to Facebook v. IRS (blogged by Les here) and picks up where the Facebook opinion left off in finding that TBOR creates no rights that did not already exist. Because Ms. Moya relied exclusively on TBOR in seeking relief and made no assignment of error regarding the substance of the adjustment in the notice of deficiency, she loses the case entirely with the exception of some concessions by the IRS.

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Ms. Moya is a college professor. She was teaching in Las Vegas at the time the examination began. During the examination she moved to Santa Cruz, California and requested that the IRS reassign her case to an examiner in her new location. She wrote to the examiner in Las Vegas to make this request. She received no response. She called with the same result. She wrote again and received correspondence from the IRS office in Denver indicating that her case would be moved to a location near her; however, the office in Las Vegas subsequently issued a notice of deficiency without ever meeting with her. She considered this a violation of her rights to have her questions answered and the right to meet with an IRS representative at a time and place convenient to her.

The notice of deficiency reduced Schedule C expenses that Ms. Moya had claimed for each of the three years under examination. In her Tax Court petition she chose not to challenge the disallowance of the expenses or the related penalties, but simply relied on the alleged violation of TBOR as the basis upon which the court could grant relief. This decision made the court’s job easier since it merely had to focus on the TBOR arguments. The decision also serves as a reminder that petitioners in Tax Court need to put at issue in the petition (or amended petition) everything they may wish to argue in the case.

By not assigning any error to the adjustments to her returns, Ms. Moya conceded those adjustments according to the Tax Court Rules 34(b)(4) and 41(b)(1) as well as a significant amount of case precedent.

In response to Ms. Moya’s TBOR argument, the IRS essentially argued that she could not make the TBOR argument in Tax Court because the proceeding is de novo. It cited to the case of Greenberg’s Express v. Commissioner, 62 T.C. 324 (1974) in support of its position. For anyone not familiar with Greenberg’s Express, it holds that the Tax Court will not look behind the notice of deficiency. It usually comes up in cases in which the taxpayer wishes to complain about the revenue agent or the audit process and is basically a statement by the court that it will not listen to those types of arguments in a deficiency case. The taxpayer must “get over” their concerns about the way the audit was conducted and instead address the merits of the audit determination. IRS attorneys regularly cite to Greenberg’s Express, because taxpayer complaints about the audit process arise frequently in Tax Court cases. Each Tax Court judge has a canned speech for taxpayers about this issue. The point of the IRS argument regarding Greenberg’s Express was that Ms. Moya essentially made a typical argument addressed by that case, just dressed up in different clothing.

Ms. Moya countered that her argument did not simply complain about the audit, but that TBOR elevated her concerns about the audit to something actionable in the Tax Court case. She sought to find rights created by TBOR that did not previously exist.

The Tax Court finds that “the history of the IRS TBOR makes clear that it accords taxpayers no rights they did not already possess.”  The court traces the statements of the Commissioner, the NTA and the legislative history.  The court cites favorably to the Facebook decision.  It concludes that:

We think there is ample evidence in the history recited to conclude that, in adopting a TBOR in 2014, the Commissioner had no more in mind that consolidating and articulating in 10 easily understood expressions rights enjoyed by taxpayers and found in the Internal Revenue Code and in other IRS guidance.  Certainly, the Commissioner had no power to legislate any new rights.

The court focuses on the Commissioner’s administrative adoption and not on the Congressional enactment of TBOR in 2015. An argument exists that making it law added something to TBOR. The court does not address any possible additional authority that occurs as a result of the passage of the law but nothing in the statute explicitly gives rights to the taxpayer not contained in the administrative provisions of TBOR. 

After the court rejects Ms. Moya’s TBOR arguments, it engages in an analysis that the court occasionally does when someone alleges bad or wrongful actions by the IRS during the examination process to determine if the IRS actions here violated norms to such an extent that the court would take action despite Greenberg’s Express. The court determines that the alleged violations here did not reach the level that would allow Ms. Moya to go behind the notice of deficiency. To go behind the notice and overcome the precedent in Greenberg’s Express would have required a very high level of IRS misconduct during the audit. Such cases are extremely rare.

The result here does not surprise me.  Taxpayers cannot point to anything in TBOR that gives them additional rights. Without something tangible, this case does seem like an attempt to go behind the notice of deficiency, simply using different dressing to make the argument. However, the decision here does not apply to non-deficiency cases. Although the outcome in a Collection Due Process or Innocent Spouse case might ultimately mirror the outcome here, those statutes have roots in equity where the pre-court process might create a better atmosphere for a TBOR argument. Several cases currently exist in the Tax Court in which taxpayers have made TBOR arguments in non-deficiency cases. We may not have to wait long to find out if TBOR has any legs in these types of cases.

IRS’s “Trust Me, it Wasn’t Yours” Defense Doesn’t Fly, Designated Orders 3/11 – 3/15/2019

There were only two orders designated during the week of March 11. The most interesting of the two contains the quote from where the title of this post originates and is potentially a step in the right direction for the whistleblower petitioner. The second order (here) was a bench opinion for an individual non-filer.

In Docket No. 101-18W, Richard G. Saffire, Jr. v. C.I.R. (order here), Judge Armen is not impressed with IRS’s dodgy behavior. The IRS objected to petitioner’s previously filed motion to compel the production of documents, so petitioner is back before the Court with a reply countering that objection. Based on the iteration of what parties have agreed upon and what the record has established, it seems as though the IRS dropped the ball while reviewing petitioner’s whistleblower claim.

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Petitioner is a retired CPA from New York and his whistleblower claim involved an investment company (the target taxpayer), a related entity (the advisor) and allegations of an improperly claimed tax exempt status. The claim was received in January of 2012. After it was submitted, but before it was formally acknowledged, petitioner also met with IRS’s Criminal Investigation Division.

In June 2012, the IRS determined that the claim met the procedural requirements under section 7623(b) and the ball was then passed to the IRS’s compliance function to determine whether the IRS should proceed with an exam or investigation.

In August two attorneys from IRS’s counsel’s office in the Tax Exempt and Government Entities (TEGE) Division, as well as a revenue agent from the TEGE Division, held a lengthy conference call with petitioner at the IRS’s request. According to petitioner, none of the IRS employees acted as though they had heard about the target taxpayer, its advisor, or issues raised by the claim previously. After the call, the IRS requested additional information which petitioner provided at the beginning of September 2012.

A technical review of the claim was completed at the end of September 2012, and the ball was again passed, this time to an IRS operating division for field assignment.

This is where the ball was apparently dropped as far as the claim itself was concerned. For five years petitioner did not receive any concrete information about the claim other than the fact that it was still open, but during that time petitioner learned from public information sources that a large amount of money was collected from the target taxpayer and that the SEC collected more than $1 million from the advisor.

Then in September 2017 petitioner received a preliminary denial letter followed by a final determination denying the claim because the IRS stated the issues raised by petitioner were identified in an ongoing exam prior to receiving petitioner’s information, petitioner’s information did not substantially contribute to the actions taken and there were no changes in the IRS approach to the issue after reviewing petitioner’s information.

Petitioner petitioned the Court. Three months later the Court granted the parties’ joint motion for a protective order allowing respondent to disclose returns, return information and taxpayer return information (as defined in section 6103(b)(1), (2) and (3)) related to the claim.  

Then petitioner requested the administrative file and five categories of documents related to the case. The IRS provided the administrative file, but it was heavily redacted and a large portion of the unredacted parts consisted of copies of the petitioner’s submission. IRS Counsel also sent information on three of the five categories, but it said that two of the categories of documents (regarding the exam of the target taxpayer and its advisor and communications between the IRS and SEC) were outside the scope of the administrative file, irrelevant to the instant litigation and were protected third-party information under section 6103.

IRS acknowledges that section 6103(h)(4)(B) permits disclosure in a Federal judicial proceeding if the treatment of an item on a taxpayer’s return is directly related to the resolution of an issue in the proceeding.

This is where the IRS’s “trust me- it wasn’t yours” defense comes into play. The IRS says the information does not bear on the issue of whether petitioner is entitled to an award because respondent did not use any of petitioner’s information. In other words, the IRS refuses to show the petitioner what information it used to investigate and collect from the target taxpayer, because it wasn’t the petitioner’s information that was used. The IRS also argues that the petitioner’s request is overbroad and unduly burdensome.

The Court finds this explanation insufficient and grants petitioner’s motion to compel discovery (with some limitations) finding that most of the documents that petitioner requests are directly relevant to deciding whether petitioner is entitled to a whistleblower award, and therefore, discoverable. The Court suggests that the information petitioner requests should be disclosed pursuant to section 6103(h)(4)(B). The Court allows respondent to redact some information (mainly, identifying information about the alleged second referral source), but orders respondent to provide an individual and specific basis for each redaction.

It’s a little odd that IRS has been so reluctant to provide the petitioner with information, but it doesn’t necessarily suggest that the reason is because petitioner is in fact entitled to an award. Now that the Court has intervened, hopefully the information will provide petitioner with a satisfactory answer as to why the IRS denied his award. 

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.

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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.