Doing the Right Thing

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We criticize the IRS regularly here, but today want to point out a case illustrating the effort the IRS and its attorneys at Chief Counsel’s office will go to in order to do the right thing.  When I worked there, a strong culture existed to find the right answer or do the right thing.  The case I will discuss today demonstrates that the culture still exists even in the face of the cuts to the budget and the unrelenting criticism.

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The Chief Counsel attorney, Nicholas Rosado, did the right thing in the context of a Rule 155 computation.  We have not talked before about Rule 155 comps and this case also offers the chance to do that.

Chief Special Trial Judge Panuthos issued an opinion in the case of Mameri v. Commissioner, T.C. Summary Opinion 2016-47.  As we have discussed before, it is a summary opinion because petitioner filed the case using the small tax case procedures of IRC 7463.  No matter whether regular, memorandum or summary, Tax Court opinions do not come with a calculation of the tax liability.  The Tax Court judges decide the issues but do not calculate the tax resulting from their decision.  In many cases, the Tax Court decides completely for the taxpayer or completely for the IRS.  In those cases, no calculation needs to precede the entry of the decision since the decision document will reflect a zero dollar liability where the taxpayer wins and a liability that mirrors the notice of deficiency where the IRS wins.

If the result of a Tax Court case splits the decision between the parties, then someone has to calculate the impact of the issues determined by the judge on the amount of deficiency proposed in the notice of deficiency in order for the parties to know the correct amount of tax the IRS may assess. Tax Court Rule 155 creates the process for making that calculation and presenting the results to the Court.  In most cases, the Chief Counsel attorney sends the opinion to a computation specialist in Appeals who turns the issues into a new liability number.  After the attorney receives the computation back from Appeals, the attorney sends that computation to the taxpayer, or the representative, who reviews the computation for correctness.  If the taxpayer thinks that the computation does not correctly calculate the tax based on the Court’s opinion, the taxpayer will bring the problem to the attention of the Chief Counsel attorney who, in consultation with the computation specialist, will agree with the taxpayer or disagree.  In most cases, and especially in cases involving pro se taxpayers such as Mr. Mameri, the taxpayer accepts the computation provided by the Chief Counsel attorney without question.  The Chief Counsel attorney then prepares a decision document which the parties sign reflecting their agreement with the amount of tax and then the Court signs the document entering the decision amount.

In a small number of cases, the parties cannot reach an agreement on the amount of the tax resulting from the opinion.  In those cases, the Court holds a Rule 155 hearing in order to rule on the computation of the parties and resolve the dispute as to the amount of tax created by the opinion.  Sometimes the dispute exists because the original opinion did not sufficiently address all of the issues and sometimes the dispute exists because one party wants to interpret the opinion in a manner not intended.  In an even smaller number of cases, there may be a disagreement about what the Tax Court can decide in a Rule 155 hearing.  Many years ago Les was involved in a Rule 155 contest in the case of Erhard v. Commissioner involving the famous Werner Erhard of EST for those of you looking for a throw-back to the 1980s. Generally, the Tax Court in a Rule 155 hearing is bound to make its computations from the evidence in the record and the opinion itself. The Tax Court case does not become final until the entry of the decision and when the amount to be placed on the decision remains in dispute, the resolution of that dispute is a predicate to finalizing the case.

In Mr. Mameri’s case, Judge Panuthos entered an opinion that required the calculation of the correct amount of tax.  At issue in the case were education credits claimed by petitioner for tuition cost and for the purchase of a computer.  The opinion allowed the cost of tuition based on the testimony of the petitioner and a letter from an instructor; however, the Court did not allow the credit for the purchase of the computer because petitioner could not show that the purchase of the computer was a requirement of the educational program as opposed to a convenience.  The Chief Counsel attorney set out to obtain the calculation resulting from the Court’s opinion.

In the course of obtaining the Rule 155 computation, the Chief Counsel attorney bumped into a proposed regulation promulgated on August 2, 2016, just three weeks before the Court had rendered its opinion on August 24, 2016.  Remember that the opinion would have been written several months after the trial of the case.  While the parties could have brought an important ruling or regulation to the attention of the Court while the case sat with the judge during the deliberative phase, the chances of a pro se taxpayer picking up on something of that nature approach zero.  The Chief Counsel attorney would have had other cases to work on and could easily miss a matter that might have impact.

The proposed regulation regarding education expenses and the credit allowed thereunder provided:

In the preparation for the Rule 155 computation, counsel for respondent brought to the

Court’s attention proposed regulation section 1.25A-1(d)(3) issued August 2, 2016. The proposed regulation interprets the meaning of “required for enrollment or attendance” as set forth in section 25A(f)(1)(A) and (i)(3) to mean that “the course materials are needed for meaningful attendance or enrollment in course of study, regardless of whether the course materials are purchased from the institution”. Respondent proposes to concede that petitioner is entitled to an education credit for the purchase of the laptop computer since petitioner satisfies the requirements of the proposed regulation.

The Court, in an order dated November 4, 2016, accepted a concession by the Government in Mr. Mameri’s case based on the proposed regulation and entered a decision in the case granting Mr. Mameri the education credit for the purchase of the computer.  During the course of having the Rule 155 computation prepared, the Chief Counsel attorney or someone in his office or in Appeals must have noticed the newly issued proposed regulation (note that the concession is based on a proposed and not final regulation) and decided that Mr. Mameri should have won the issue regarding the computer in his Tax Court case.  I am sure Mr. Mameri appreciates the concession by the Government in his case and we can all feel a little bit better about the tax system because of the actions of the Chief Counsel attorney, Nicholas Rosado.

 

Comments

  1. Charles F Schreiber says

    My hat is off to Mr. Rosado. Doing the right thing deserves recognition.

  2. Laurie Conner Jarrett says

    I believe that most IRS employees are dedicated to “doing the right thing.” I appreciate your sharing an example of that with us.

    • Henry Shackleford says

      Yes, many IRS employees are noble and impartial. But, then along came Lois Lerner and gang of her evildoers. And there is likely more in other places. And then there’s the CIR.

  3. Before IRS and the Tax Court sustain injuries from patting themselves on the back, let’s acknowledge that the August 2016 proposed regulations are based on legislation enacted in 2014. (Yes, I know Treasury doesn’t have enough lawyers to write regulations in a timely manner because too many lawyers are occupied with losing Tax Court cases.) I wonder how many college students failed to claim a credit for their computer, because of the delay in conforming the regulations to the statutes. Also, correct me if I am wrong, but the correct citation is not proposed regulation section 1.25A-1(d)(3), but section 1.25A-2(d)(3). I am finding this at

    https://www.irs.gov/irb/2016-33_IRB/ar11.html

    The fact is that both Judge Panuthos and IRS Attorney Rosado blew this case, dragging a college student into court to defend what IRS Publication 970 had told him was allowable. The decision was based, at least in part, on the fact that the laptop was not purchased directly from the school. “There is no evidence that petitioner was required to purchase the computer directly from Berkeley City College. Instead petitioner was able to and in fact did purchase the computer from a third party. Thus the cost of the computer is not an expense that qualifies for the education credit.” (Page 8 of the opinion.)

    But IRS Publication 970 for 2012, page 9, stated that “course materials” are eligible for the American Opportunity Credit “whether or not the materials are bought at the educational institution as a condition of enrollment or attendance.” It’s the Lifetime Learning Credit for which “course materials” have to be bought from the school — then, and now.

    • Good comment. As usual, I did not dig behind all of the factors and this comments adds to the understanding of case and the situation. I did not want anyone to hurt themselves with back pats but and this comments helps to fill in the picture. The case, however, points out the problems in an adversarial system when one party proceeds unrepresented. The system does not anticipate that the Court or the opposing party will look for everything that might help the pro se litigant. Perhaps the Chief Counsel attorney could have or should have found the correct answer sooner but the system expects the litigants to find the best arguments for their side of the case. For me, this case not only points out that the government attorney seeks to have the right result in the case but also the need for pro bono and clinic representation. For the system to work best, the petitioner or his counsel should have found the regulation and the publication. The system should not rely on the government or the Court to find the right answer. I am glad the right answer came out whether late or in a timely fashion.

      • It is not so much an adversary system as it is an absurdity system. The challenge to the taxpayer – in Congress’s eyes, a recipient of financial rewards for behavior that is encouraged; in IRS eyes, an assumed fraud perpetrator – begins with an unseen and poorly trained examiner at a remote IRS warehouse, approving the issuance of a computer notice demanding explanations. It is the tax system’s equivalent of photo radar cameras that replace actual traffic cops.

        The taxpayer, with no realistic opportunity for human contact at a local site, often just gives up. The only alternative is a system created for million-dollar corporate tax disputes. What we find there are two law school graduates, a judge and an IRS lawyer, who do not know the law and may not really care to find out. “Can I claim an education credit for my computer” is not rocket science. It’s one I encounter in my tax return preparation practice, two or three times a year. It may take half an hour to find the answer the first time, but no more than five minutes subsequently. Unfortunately, the IRS lawyer and the Tax Court judge have no recent experience with actual clients and actual tax return preparation.

        In a discussion of Supreme Court decisions, one of my law school professors noted that “law and order” may be a political issue but “we don’t teach politics in law school.” Law students, however, need to know why “abolish the IRS” resonates so bigly in political circles these days. Just because no reasonable equivalent is offered, does not mean the slogan will not win elections.

        Taxpayers know what they know. They know that the system is absurd, and in cases like this one it takes small potatoes and mashes them. And I am not willing to sustain injuries, jumping to conclusions. The plaintiff Mr. Mameri also seems to have won a $4,000 judgment in small claims court against Penske Truck Leasing. It’s just as likely that he discovered the proposed regulations (together with some long-settled law) and had to convince Counsel of its error during the Rule 155 negotiations. It’s not ironic that it takes someone with Algerian roots to teach Americans justice. To quote the line from the musical “Hamilton:” immigrants get the job done.

        • David Woods says

          Terrific observation by you Bob on what the law said and when. Even as a practicing professional, it is incredibly irritating (being kind here) when dealing with the IRS on a matter of law and the IRS agent doesn’t know and doesn’t listen or take your word on it. I don’t expect every agent to know every aspect of law and don’t have an issue with that. But when you explain a matter of law that is black letter and the response is akin to “I don’t believe you”, there’s an institutional problem. While IRS representation is adversarial, taxpayer representatives are not supposed to mislead IRS personnel. Given that, the level of mistrust given is appalling.

          • David Woods is dead on. The agents’ knowledge is often sparse and they are often not open to learning or investigating the law. This mentality leads to a large number of otherwise unnecessary Tax Court filings.

  4. My experience with the IRS attorneys out of the Cincinnati office is that they are honest and try to do the right thing. We have had our disagreements – but they have been honest disagreements.

    I think that such a sense of honor is much less common at the audit level. The auditors often strive to “nail” a taxpayer, and are often possessed of a heartless & thoroughly bureaucratic impulse. I’d love to see the ethic that permeates the Cincinnati Chief Counsel’s office spread downward to the lower ranks.

  5. Chris Kenefick says

    “The system does not anticipate that the Court or the opposing party will look for everything that might help the pro se litigant. Perhaps the Chief Counsel attorney could have or should have found the correct answer sooner but the system expects the litigants to find the best arguments for their side of the case.”

    With tongue in cheek, I say: Doesn’t that approach fly in the face of the IRS’ own mission statement, which is to:

    “provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all.”

    …note the part about “integrity” and “fairness.” I should also point out that the old mission statement stated in part:

    “The purpose of the Internal Revenue Service is to collect the proper amount of tax revenue…”

    With tongue still in cheek, when I read these mission statements, it seems pretty obvious that the IRS is bound to uncover anything and everything that is pro-taxpayer. While the court part of the system might not anticipate that nicety, it seems that it is the self-professed duty of the IRS part of the system…

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