Guest blogger William Schmidt from Legal Services of Kansas brings us the designated order post from a few weeks ago as we continue catch up on this feature. Today’s post looks at burden of production, debt cancellation and the somewhat unusual reference to trial by battle. Les
This week provides 7 designated orders. The batch includes some short items of note, a followup on a previous case, a focus on cancellation of debt/insolvency, and a bit of creative writing. The first order grants the motion for summary judgment from the IRS since the petitioner was non-responsive (Order and Decision here). Another finds that the case is moot, since the liability was satisfied and the proposed levy is unnecessary. Judge Panuthos goes beyond the call of duty by providing an explanation for the petitioner in response to his assertions (Order of Dismissal Here). The third has the petitioner making unfounded claims of misconduct by IRS personnel and requesting a continuance. Since the petitioner previously received a continuance and had filed for bankruptcy (staying the Tax Court case), which was pending for a year before being dismissed without objection, the Court denied petitioner’s request for continuance (Order Here).
read more...Further Followup on Mr. Kyei
Docket # 9118-12, Cecil K. Kyei v. C.I.R. (Order of Dismissal and Decision Here).
I previously wrote about Mr. Kyei’s case here and here. In brief, Mr. Kyei had filed bankruptcy multiple times and one automatic stay from a bankruptcy case potentially voided a settlement agreement with the IRS. Previously, the Tax Court ordered the IRS to address the issue of burden of production as to the penalty for 2010. Mr. Kyei was to file a response to their supplement for the previously filed motion to dismiss.
The IRS supplement stated they could not meet the burden of production and conceded the penalty of $2,614.80 for 2010. Mr. Kyei did not respond. The Court ordered that there were deficiencies in tax for Mr. Kyei for 2008 and 2010 based on the notices of deficiency. All other amounts, including the 2009 deficiency and all three years of penalties were reduced amounts. In total, the 2008 deficiency was $15,518.00, with a 6662(a) penalty of $1,551.80 and a 6651(a)(1) penalty of $4,017.40. The 2009 deficiency was $7,830.00 and 6662(a) penalty of $783.00. The 2010 deficiency was $26,148.00 and there were no listed penalties.
Cancellation of Debt and Insolvency
Docket # 15337-16S, Kamal Rashad Ellis v. C.I.R. (Order Here).
Docket # 25294-16S, Terry Thomas Woods v. C.I.R. (Order and Decision Here).
Based on these two orders, I thought I would give a spotlight to some issues regarding cancellation of debt income and insolvency.
The first is based on a bench opinion by Judge Buch. In the opinion, Mr. Ellis testified regarding his Discover cards. He had at least 3 different Discover credit cards and there were two Form 1099-C forms reported to the IRS by Discover Financial Services for two of those cards. Based on $7,347 of cancellation of debt income, that brought $2,058 of additional tax for Mr. Ellis for 2013 so he filed a petition with Tax Court. Mr. Ellis testified he did not receive the 1099-C forms and could not find his Discover Card records because of a house fire. He also testified he previously disputed at least 3 charges in 2006 on one of his cards. Because Mr. Ellis did not provide testimony that sufficiently disputed the cancellation of debt income, the Court found in favor of the IRS.
The second order also concerns cancellation of debt. Mr. Woods defaulted on a car loan with GM Financial. The company cancelled the debt and issued to him a Form 1099-C for $7,559, which was not included on petitioner’s 2014 tax return. The notice of deficiency was for tax of $1,132. After Mr. Woods filed a petition with Tax Court, the parties eventually conferred enough for the IRS to send him decision documents on July 20, 2017. He did not respond and when the IRS called him on September 20, 2017, his stated he “completely forgot about it.” After that point, petitioner was unresponsive. The IRS filed a motion for summary judgment, which the Court granted, deciding the deficiency in tax due for 2014 was $1,132.
I make note of the Court’s discussion of cancellation of debt income and the insolvency exception. To begin, cancellation of debt income is included in a taxpayer’s gross income. An exception is if the discharge of debt occurs when the taxpayer is insolvent. A taxpayer is insolvent to the degree that liabilities exceed the fair market value of assets. The amount of income excluded by virtue of insolvency is not allowed to exceed the actual insolvency amount. Since Mr. Woods did not provide anything to prove his insolvency, the Court had to include the full cancellation of debt income in his gross income as stated by the notice of deficiency.
Takeaway: In my experience, Form 1099-C, bringing cancellation of debt income, can be devastating to low income clients. IRS Publication 4681 details ways to exclude cancellation of debt income. I use the insolvency worksheet (on page 6 of IRS Publication 4681 for tax year 2017) to assist my clients. They fill out the worksheet by listing their debts and the fair market value of assets as of the date the debt was cancelled (not today’s value!). Then, they are to use IRS Form 982, by checking the box for line 1b, and using line 2 to list the smaller amount of the debt cancelled or the amount the client was insolvent. It may be necessary to amend a tax return to attach this form to a client’s tax return. Overall, this method will reduce or eliminate the cancellation of debt income and its related tax liability. This could significantly improve your client’s financial situation.
And Now For Something Completely Different
Docket # 25781-12 L, Estate of Jeanette Ottovich, Deceased, Randy Ottovich, Harvey Ottovich, and Karen Rayl, Executors v. C.I.R. (Order Here).
This order is rather mundane – the parties need to file a status report on the probate proceedings. It is the footnote that is noteworthy, partly because it is longer than the order itself – in fact, it is 120 words, as compared to the 116 word order (your count may vary). The footnote is next to the phrase “there are only two issues left for the parties to battle over,” which allows for Judge Holmes to engage in creative writing that I will quote in its entirety for your appreciation:
“We stress this is a metaphor, although we also note that today is the exact bicentennial of the last trial by battle in the English-speaking world. See the onomastically excellent for our Court Ashford v. Thornton, 1 B & Ald. 459 106 E.R. 149 (1818) (Ashford declined battle; Thornton possibly got away with murder and ended up in Baltimore); see also “No ‘Game of Throne’ Throwdown,” Staten Island Advance (March 28, 2016) (NY Sup. Ct.) (acknowledging trial by battle still available in New York State). (The case should be better known by tax lawyers for the opinion of Lord Chief Justice Ellenborough: “it is our duty to pronounce the law as it is, and not as we may wish it to be”).
About William Schmidt
I love the Ashford v. Thornton case! Props to Judge Holmes for citing it. For those not familiar with the case, it involved the British right of “appeal” – which, in addition to the meaning we’re more familiar with, refers to a criminal prosecution by a private party rather than the state. Its history preceded government prosecutions and carried with it the right (with some exceptions) to trial by battle. Thornton had already been indicted and acquitted but British law did not apply the principle of double jeopardy to preclude a second, private, prosecution (by the murder victim’s brother).
For those interested in further reading, you can find it in Chapter 2 of “The Law of The Land: The Evolution of Our Legal System” by Charles Rembar. The author points out that the right of appeal arose in common law but had been ratified by an Act of Parliament in the 14th century; the right to a trial by battle in such cases was solely based on the common law. The court could have abolished the right to trial by battle but could not have eliminated the right to appeal. The author speculates that upholding the right to trial by battle was the court’s attempt to put pressure on Parliament to eliminate both. Which Parliament did.