Designated Orders June 15 – 19 2020 Part II of II: Tax Procedure Final Exams!

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The prior designated order post focused heavily on a new issue in the procedural world: whether the Tax Court has jurisdiction to issue a writ of mandamus ordering the IRS to issue a Notice of Determination in a whistleblower case. The remaining orders of that week don’t break such new ground, but do bring up a lot of fun procedural issues. Indeed, one of the orders reads like a potential Tax Procedure Final exam and provides helpful refreshers to practitioners as well.

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Tax Liens and Tax Procedure: A Game of Inches. O’Nan v. C.I.R., Dkt. # 5115-17 (here

Convoluted fact patterns and the importance of dates/timing are hallmarks of law school exams. I still recall my exact thoughts after reading through the prompt for my Wills and Trusts exam: that would never happen. No one in history has ever written their “will” on a cocktail napkin, stepped outside the bar and been hit by a car. [Note: I may be misremembering the exact facts of my final exam, but it wasn’t far off from that.] The facts in O’Nan are not quite so far-fetched, and since it actually happened may serve as a useful template (or rebuke) to stressed out law students complaining about endless hypos. 

In O’Nan, husband and wife had joint liabilities for 2012 and 2013, which were assessed by the IRS on November 18, 2013 and November 17, 2014 respectively. The order doesn’t specify what avenue the IRS took to get to assessment (e.g. deficiency procedures or summary assessment of amounts listed on the returns), but judging from how quickly after the filing deadline these assessments took place, I’d be willing to bet on “summary” assessment. That little implicit fact might just matter… But more on that later.

Anyway, the O’Nans had liabilities assessed for both 2012 and 2013 as of November 17, 2014. On that same day the IRS mailed a CP14 letter to the O’Nans for 2013 demanding payment. It is unclear when the 2012 demand for payment was mailed, though one would assume it was earlier than that: the remainder of the order focuses predominantly on 2013. 

Sadly, only eight days after the notice and demand letter was sent (November 25, 2014) Mr. O’Nan passed away. Months pass, and people focus on things more important than taxes for the remainder of 2014.

On March 11, 2015, Ms. O’Nan records a “Survivorship Affidavit” in the county where the marital home is located. This effectively means that she has an undivided property interest in the home, whereas before it was a joint tenancy. Shortly thereafter (April 28, 2015), the IRS filed a Notice of Federal Tax Lien in that same county, though the order does not specify for which tax year (i.e. 2012, 2013, or both) or for which taxpayer (i.e. Ms. O’Nan, Mr. O’Nan, or both). More facts a discerning student may underline.

Possibly spooked by that Notice of Federal Tax lien, Ms. O’Nan filed an Innocent Spouse request on May 6, 2015. A little over a month after filing the Innocent Spouse request, Ms. O’Nan sold the marital home for (at least) a gain of $123,200… which promptly goes to the IRS in full satisfaction of the 2012 and 2013 joint liabilities.

An unhappy result for Ms. O’Nan I’m sure, but (maybe?) not the end of the story. After all, the Innocent Spouse request is still outstanding, and a couple years later (February 2017) the IRS issues the following determination: “Good news: you are granted full relief for 2013 and partial relief for 2012! Bad news: you are entitled to $0 in refund for either of those years.”

Apparently Ms. O’Nan wasn’t happy with a piece of paper from the IRS effectively saying “We’ve relieved you from the joint tax debt that was paid through the sale of your home, but you aren’t getting any of it back.” So she filed in Tax Court, bringing us to the present day and this order. And, just to add a little more procedure in the mix, this order is only on a motion for partial summary judgment by the IRS on the question of when the federal tax lien (FTL) arose under IRC § 6321.

That narrow question actually has a pretty easy answer. The broad (“secret”) federal tax lien arises at the date of assessment, so long as notice and demand for payment is made within 60 days of assessment. See IRC § 6303. If the notice and demand is properly made within those 60 days, the effective FTL date “relates back” to the date of assessment. 

Looking only at the 2013 tax year (the order is mostly silent about 2012) the assessment took place on November 17, 2014 and the notice and demand for payment was mailed on the same day. Accordingly, in this instance there isn’t even the need to “relate back” to the assessment date from a later-mailed notice and demand. The federal tax lien arose on November 17, 2014. Easy answer on the main issue, I’d say, but let’s look at some wrinkles:

Bonus points to students for those who advised putting the IRS mailing of the Notice and Demand at issue. If the Notice and Demand for payment were severely defective (or never actually mailed), it is possible (but by no means guaranteed) that in certain circuits the federal tax lien would not arise on November 17, 2014. Frankly, I think you could write a whole test question just on what the effects of failing to properly mail a Notice and Demand for payment are. It isn’t always clear or consistent.

Extra-special bonus points to students (or practitioners) that note potential evidentiary issues with the Notice and Demand for payment. The IRS provided transcripts as proof of proper mailing, but the IRS gets things wrong all the time -particularly with dates on notices (see Keith’s post here for an instance where the IRS effectively decided it was OK to send notices with bad dates). Judge Panuthos notes, however, that petitioners did not raise any arguments challenging the presumptively correct mailing record, so the argument essentially falls by the wayside. 

Note, however, that in this instance the Petitioner actually does raise an argument about the Notice and Demand. But it is a purely legal argument about the notice being untimely because it was issued too early after assessment. This legal argument is quickly and correctly dismissed as being a strained and improper reading of the statute. In my experience, I would say that a law student is more likely to raise that (doomed) legal argument than the more promising factual one: law school tends to focus on laws more than facts, after all.

Ok, so we’ve solved the narrow issue before Judge Panuthos here, which is when as a matter of law the federal tax lien came into existence. (It just so happens that Judge Panuthos worked extensively on collection matters as an attorney with Chief Counsel before becoming a Tax Court Judge, so he is likely better suited than most to wade through these tricky lien issues. Thanks to Keith for alerting me to this bit of information.) Partial summary judgment granted. But what remains to be disposed of in this case? What other Federal Tax Procedure Final Exam prompts might we take from this order? 

First off, consider whether and why the precise date of the federal tax lien even matters in this instance. Recall that the IRS filed a Notice of Federal Tax Lien (NFTL) before the property was sold, and also that Ms. O’Nan was liable for the entire 2012 and 2013 debt. Recall that unlike a “secret” tax lien, an NFTL takes priority over a for-value purchaser. See IRC § 6323(a). Wouldn’t the IRS be entitled to the proceeds regardless of the notice and demand issue?

I think the answer is “yes,” but a little more analysis is helpful to tie up potential loose ends. Those loose ends only really exist since the IRS granted innocent spouse relief, effectively cutting ties that otherwise bind Ms. O’Nan to joint and several liability.

As is frequently mentioned on this blog and elsewhere, the reach of the federal tax lien (FTL) is exceedingly broad. It is certainly broad enough to attach to Mr. O’Nan’s interest in the marital home before he passed away… so long as it arose before he passed away (i.e. when he still had an interest). Just as important as the breadth of the FTL is its resilience -that it sticks with real property that changes ownership through gift or, in this case inheritances. (See IRC 6323(h)(6), defining “purchaser” (one of the categories that otherwise defeats an FTL) but would not include a conveyance by inheritance.) 

Putting it all together, Ms. O’Nan needs to show that at the time the FTL came to exist her late-spouse had no interest in the marital property that the FTL could “attach” to. If that is the case, Ms. O’Nan still owes the tax liabilities but (critically) when the home is sold the proceeds going to the tax debts could only be attributable to her. That sets us up for her innocent spouse claim: the payments are solely attributable to Ms. O’Nan, who the IRS concedes doesn’t owe the tax (i.e. granted relief from liability). Unless the IRS can say “actually, the payments that fully eliminated the (previously) joint tax debt were attributable to the lien from your late spouse” it certainly seems like a refund would be in order.

Which gets to the final prompt: the circumstances for getting refunds in innocent spouse cases. For ultra-special-bonus-points we go all the way back to why the method of assessment matters. If the liability was from a summary assessment (i.e. tax reported on the return) then the only “type” of innocent spouse relief available under IRC § 6015 is “equitable” relief (IRC § 6015(f)) because it must be an “underpayment” and not an “understatement.” If it is an understatement you (potentially) get into other factually thorny issues about whether (b) or (c) relief is available.

This matters mostly in the context of getting a refund. You can only get 6015(f) relief if you are not entitled to relief under 6015(b) or (c). This is important because refunds are available under (f), whereas they are not available under (c) which is generally the easiest variety of relief to get. And if the only reason you can’t get (c) is because you want a refund, the Treasury Regulations provide that you are out of luck (see Treas. Reg. § 1.6015-4(b)). As blogged on previously here, the IRS also sometimes appears to default to “c” relief causing exactly these sorts of problems (it doesn’t appear to me that simply checking the “I’d like a refund” box on Form 8857 fixes the problem)

The IRS used to take a much stingier line on when you could get a refund under IRC 6015(f). Current IRS guidance (Rev. Proc. 2013-34), however, has liberalized such that refunds are generally available if there is a timely claim and the amounts paid are attributable to the requesting spouse. Which neatly brings us all the way back to why the FTL timing matters so much… determining which spouse the payment could be attributable to. After all, both spouses legitimately owed the tax at the time the IRS swooped in on the sale proceeds.

There are, undoubtedly, other questions and prompts one can pull from this scenario. In particular, the order provides look at the intersection of state law for determining “property rights” and federal law for how the FTL attaches to those rights. But those are prompts for another day.  

Theft Loss Issues with a Side of Tax Procedure. Bruno v. C.I.R., Dkt. # 15525-18 (here)

The fact-intensive nature of “theft losses,” as well as its interplay with other code sections (itemized deduction limitations, net operating losses, etc.) tends to make for good Federal Income Tax test prompts. And this order is no different, involving an alleged theft loss of roughly $2.5 million(!). The facts in this case are also sordid enough to keep students interested: the “theft” at issue arises from a divorce and supposed conspiracy of the ex-husband to hide assets from petitioner through a series of entities owned by the ex-husband’s family. 

Plenty of interesting stuff on the substantive question of whether (and critically, when) a theft loss may have occurred. But since this is a Tax Procedure blog, it seems fitting to focus on the procedural issue at play giving rise to the order at hand. 

The order from Judge Lauber tells the parties to file a supplemental stipulation of facts. Why not just parse out the facts that are needed in trial, you ask? Because the parties filed a motion to submit the case under Tax Court Rule 122 (i.e. “fully stipulated”). Judge Lauber is basically saying “What you’ve stipulated to isn’t enough for me to know if/when the theft loss is appropriate. Give me more.”

And here is where we get to tax procedure. Recall that the burden of proof is generally on petitioner, challenging the Notice of Deficiency, to prove that she is entitled to the theft loss. (See Welsh v. Helvering, 290 U.S. 111 (1933)) This does not change under Rule 122 submissions: subparagraph (b) of Rule 122 pretty specifically states as much. If the stipulations aren’t enough to show one way or another if the theft loss deduction is appropriate, shouldn’t the default be “petitioner loses?” 

Probably yes, but that doesn’t mean the Tax Court has to jump to that conclusion. And power to Judge Lauber for not doing so. As noted before (see post here), the Tax Court generally wants to get things right, and not to decide based on foot faults. Ruling based on insufficient stipulated facts, particularly where the parties may well end up agreeing on the facts that matter, may not quite be a foot-fault, but certainly seems unfair without first giving the parties a chance to fix the issue. If they don’t agree to the stipulated facts, however, I think there are problems for Petitioner. Until then, however, Judge Lauber seems to take the best approach. (Also (in my humble opinion) I think the Tax Court may be more willing than usual to accept and work with Rule 122 cases during this time of “virtual trials.”) 

Remaining Designated Orders – Conservation Easements That Sound Too Good to be True (Little Horse Creek Property, LLC v. C.I.R., Dkt. # 7421-19 (here) and Coal Property Holdings, LLC v. C.I.R., Dkt. # 27778-16 (here)

Finally a brief note on a couple of designated orders that arose from conservation easement cases. I recall at one of the first tax conferences I ever attended in 2012, practitioners (focusing on tax planning, not controversy) crowing about conservation easements. Now, interestingly enough, these years later conservation easements are still a topic frequently being discussed in the tax world, though now mostly by litigators… usually a bad sign for the planners. 

Coal Property Holdings pretty well illustrates the general state of affairs, with the taxpayers now arguing only over whether they should get hit with a 40% penalty for gross valuation misstatement under IRC § 6662(h). Post-script: in the time since this order was issued, the Tax Court entered a stipulated decision (here) where the parties agreed to the 40% penalty, and reducing the charitable contribution from $155,558,162 (on the return) to a slightly-less-magnanimous $58,162. Ouch.

About Caleb Smith

Caleb Smith is Visiting Associate Clinical Professor and the Director of the Ronald M. Mankoff Tax Clinic at the University of Minnesota Law School. Caleb has worked at Low-Income Taxpayer Clinics on both coasts and the Midwest, most recently completing a fellowship at Harvard Law School's Federal Tax Clinic. Prior to law school Caleb was the Tax Program Manager at Minnesota's largest Volunteer Income Tax Assistance organization, where he continues to remain engaged as an instructor and volunteer today.

Comments

  1. Offset program.why does the dad beat dad .not held responsible for back time child support .I struggled to provide ..if I owe government I received nothing .so why don’t that apply to him

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