Designated Orders the Week of July 30 – August 3

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Samantha Galvin from University of Denver’s Sturm Law School brings us this week’s designated orders. We congratulate Professor Galvin on her recent promotion to associate professor (and congratulate the law school on its wise decision.)  The first order she discusses concerns a somewhat unusual taxpayer. We thank Bob Kamman for bringing the back story to our attention. If the case goes to trial and the taxpayer does not change his arguments, he may face additional penalties for taking a groundless position that needlessly burdens the Court even if it is entertaining.  Professor Galvin points you to additional information if you find his story entertaining. Keith

There were a good number of designated orders the week of July 30, most were unremarkable, but for those interested they can be found: here, here, here, here, here and here.

And of course, Chai/Graev was back but in a slightly different context this time being used as a defense to penalties in a case where (consolidated) petitioners do not want the record to be reopened. The order (here) includes an analysis of the penalty rules applicable to C Corporations, individuals and a TEFRA partnerships.

But on to the orders I found most interesting…

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Credit for Creativity

Patrick Combs v. C.I.R., Docket No: 22748-14 (Order here)

My lecture on the assignment of income doctrine typically begins with me stating that it’s an antiquated concern that is rarely at issue in today’s electronic, information reporting world. Aside from genuine identity theft cases, it’s difficult for taxpayers to argue that someone else should pay tax on income earned by them and reported to the IRS in their name – so I was delighted to see this order be designated during the week of July 30.

Before getting into the details of the order, this petitioner’s background is worth mentioning. He is a monologist whose most famous work to date is a show called “Man 1, Bank 0” which details his successful attempt at cashing a non-negotiable, fake advertisement check for nearly $100,000 and the aftermath that followed when the bank realized its error. It’s worth a Google search.

Unlike writing him off as just another tax protestor, I can’t ignore the fact that his arguments (which are almost performance-like) in Tax Court may evolve into yet another successful comedy show.

So why is he in Tax Court? Petitioner failed to report income he earned as a monologist and from rental real estate that he owned in San Diego. At the time of this order, the Court had provided petitioner with many opportunities to reach a settlement and went as far as issuing a preclusion order, which barred petitioner from introducing at trial any records he failed to disclose to the IRS by a December deadline.

Petitioner met this deadline and the documents he provided included a written statement on the theory (or the “epiphany”) of his case. His theory involves another taxpayer, Mr. Holcomb (“Mr. H.”) and while the exact nature of their relationship is not disclosed, petitioner states that he is a penniless artist entirely dependent on Mr. H. to whom he has signed over (either via trust or agency agreements) all his income and property.

As a result, petitioner does not understand how he could be liable for any tax because if there are any taxes due they are due strictly from Mr. H. and the Court should address the issue with Mr. H.

Even if the Court had a reason to address anything with Mr. H, it would be difficult to do so. Mr. H. has his own interesting background and was recently found guilty by a jury of four counts of making a false statement to a financial institution.

Petitioner’s argument that he has no rights to the income becomes contradictory when he also writes that he is authorized by Mr. H. to spend the “signed over” funds for petitioner’s personal purposes in whatever way petitioner sees fit. This arrangement, petitioner states, “goes to the heart of why I chose to be one of [Mr. H.’s] fiduciaries in the first place. I am an artist (monologist) and there is no better space for an artist to be in other than one that frees him of all concerns relative to financial liability (income tax included), while at the same time being able to properly provide for himself and his family members.” Petitioner concludes his impassioned written statement with, “in simple straight forward speak; I am a “kept” man.”

The “trust arrangement” that petitioner has with Mr. H. calls Mr. H. the “director” of petitioner’s future income and property, and in return, Mr. H. agrees petitioner is the “manager” or “general manager” of such income and property and is free to do whatever petitioner wants to do with it.

The Court calls it an anticipatory assignment of income and warns petitioner that a 6673 penalty may be in his future if he continues with his theory.

The Court grants summary judgment in part for petitioner’s failure to report income, orders the parties to submit settlement documents with respect to other issues and if no settlement is reached expects the parties to appear at trial – where I’d expect there to be an inspired performance by petitioner.

Quash a Lot

Mufram Enterprises LLC, Wendell Murphy, Jr, Tax Matters Partner, et al. v. C.I.R., Docket Nos: 8039-16, 14536-16, 14541-16 (Order here)

Next before the Court is petitioners (in a consolidated docket) motion to quash two subpoenas duces tecum, which the Court grants in part.

The case involves a property appraiser that petitioners retained as a consulting expert, and specifically not as an expert witness, to assist them in preparing their case. Before the case commenced, the appraiser had also been hired by prospective lenders to appraise the properties involved in the case.

Respondent had requested appraisals of the properties from petitioners, but petitioners said appraisals did not exist.

Respondent issued a subpoena to the appraiser requesting documents beginning when he had become petitioners’ consulting expert. Without looking at the details of the subpoena, the appraiser stated aloud that he was not surprised by the subpoena because he had done appraisals of the properties.

This prompted IRS to issue another subpoena to the appraiser for records and correspondence from the last 23 years. The subpoena also requests that the appraiser testify at trial about facts, but not as an expert witness.

Petitioner argues the first subpoena should be quashed because the documents beginning at the time the appraiser became a consulting expert are protected work product, and the Court grants this motion to quash.

Regarding the second subpoena, petitioner argues that requiring the appraiser to produce records or correspondence that pre-date 2010 (the year of the first property appraisal related to this case) is unreasonable and oppressive. The Court agrees and limits the scope of the subpoena to the appraiser’s non-work product records and correspondence beginning in 2010.

With respect with whether the appraiser will need to testify at trial, the Court will hold judgement on the matter until trial, but if IRS intends to call the appraiser it will determine whether it is as a fact or expert witness, rule on the propriety of his being called, and then determine what fee amount (either the regular or expert witness fee) the IRS should pay to him.

Motion to Compel and Section 6103

Loys Vallee v. C.I.R., Docket No: 13513-16W (Order here)

Here is another whistleblower case where the IRS is arguing that petitioner’s submission did not lead to the collection of any tax, but in this case, the administrative record does not clearly demonstrate that.

Petitioner filed motion to compel production of documents and respondent filed a motion for summary judgment.

In opposition to respondent’s motion, petitioner is (as construed by the Court) challenging the sufficiency of the administrative record. Pursuant to Kasper v. Commissioner, 150 T.C. No. 2, the Court limits the scope of its review in whistleblower cases to the administrative record, but the administrative record can be supplemented if it is incomplete or when an agency action is not adequately explained in the record.

Respondent’s position is that the returns were already selected for exam at time petitioner’s information was received as supported by declaration from IRS employees, however, the administrative record does not contain the declarations that respondent relies upon. It also appears that employees beyond the ones identified by respondent were involved in reviewing petitioner’s submission.

Petitioner’s motion to compel is broad and requests information about all of the target taxpayers in his whistleblower submission (referred to a Corporate D, Related A and Related B by the Court). There are section 6103 disclosure concerns that come with petitioner’s motion to compel. Section 6103 generally prohibits disclosure of returns or return information, but there is an exception under 6103(h)(4)(B) that return information can be disclosed in a judicial proceeding pertaining to tax administration if treatment of an item reflected on a return is directly related to resolution of an issue in the proceeding.

Without ruling on petitioner’s motion (holding it in abeyance), the Court orders respondent to file petitioner’s Form 211 (the whistleblower application) and its attachments with the Court to enable it to review petitioner’s claims. It also orders respondent to respond to petitioner’s challenge to the sufficiency of the administrative record, and denies respondent’s motion for summary judgment.

 

Samantha Galvin About Samantha Galvin

Samantha Galvin is an Associate Professor of the Practice of Taxation and the Assistant Director of the Low Income Taxpayer Clinic (LITC) at the University of Denver. Professor Galvin has been teaching full-time at the University of Denver since October of 2013 and teaches courses in tax controversy representation, individual income tax, and tax research and writing. In the LITC, she teaches, supervises and assists students representing low income taxpayers with controversy and collection issues.

Comments

  1. Your content is solid as a rock. That goes without saying. But you need better titles on a lot of these. These show up in my email inbox as “Designated Orders the Week of July 30 – August 3.” Ask yourselves is that sounds catch and has the emotional pull needed to get your audience’s attention. Treat these like the pieces of art that they are.

    • Jesse – We welcome any suggestions you have on how to do a better job of titling our posts. The author usually has no one to blame but themselves for the title to a post but designated orders contain multiple items and are difficult to succinctly title based on content. Your point is well taken. Let us know how to fix the titling of the posts. Keith

  2. Raymond Cohen says

    Doesn’t placing initials on the penalty notice as opposed to fully signing the form violate the IRS’ own procedure for signing? Based on this and Chief Counsel memo stating that a complaint should be dismissed if there is no signature and the above, isn’t this a violation of the Administrative Procedure’s Act (APA) by being arbitrary, capricious, and an abuse of discretion?

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