How Will IRS and Taxpayers Deal with the Administration’s Newfound View that the Entire ACA Is Unconstitutional?

Today we welcome back guest poster Tom Greenaway. Tom is a principal in KPMG’s Tax Controversy Services practice. Tom raises a question about a potential collateral consequence of the Administration’s new litigating position in the ongoing Affordable Care Act litigation. For background on the case and additional implications, I recommend Katie Keith’s Health Affairs blog post. Christine

Last week the Department of Justice signaled that the United States now thinks that the entire Affordable Care Act (Obamacare) is unconstitutional, in a filing in the Texas v. United States case. Eventually that position will be tested and decided by the appellate courts–again–but in the meantime, what will federal agencies like the IRS do?


For instance, the 3.8 percent tax on net investment income was added to the Internal Revenue Code by the ACA. It generates about $20 billion in revenue each year. Will IRS put out guidance saying that taxpayers don’t need to pay that tax anymore? Doubtful.

Generally, both practitioners and the IRS dismiss, as frivolous, arguments that the federal tax laws are unconstitutional.

Nevertheless, some taxpayers may take the view that if both a district court and DOJ think the entire ACA is unconstitutional, there must be at least a reasonable basis, if not substantial authority, for that position. If so, taxpayers who decline to pay net investment income tax this filing season may avoid penalties in the event that they (and the administration) are proven wrong on the constitutional question.

Does it seem fair for the IRS to impose accuracy-related penalties on taxpayers who take the exact same position on an issue as DOJ?


The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG LLP.

©2019 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

MAGI Challenge Fails to Save Premium Tax Credit; Last Minute Adjustments for 2018 Returns

The Premium Tax Credit can make health insurance affordable for people without other options, but its structure of advance estimated payments combined with a sheer eligibility cliff when the advance payments are reconciled inevitably leads to harsh outcomes in some cases. (A few were discussed on this blog here.) The Tax Court’s recent decision in Johnson v. Commissioner, 152 T.C. No. 6, is another example of the uphill battle taxpayers face in fighting harsh reconciliation outcomes. However, for some taxpayers reconciling 2018 advance payments, it may still be possible to nudge their modified adjusted gross income (MAGI) beneath the eligibility threshold.

According to CMS’s 2019 Open Enrollment Report, 11.4 million people signed up for Marketplace insurance for 2019 during the open enrollment period. The average premium before application of tax credits was $612; but, 87% of customers received advance premium tax credits (APTC) to lower their premiums. For the nearly 10 million people receiving APTC, the average premium is $87/month. That’s an expensive benefit to repay if you are found ineligible at tax time.


In a previous post, I explained the safety valves in Marketplace regulations that may help taxpayers facing tax deficiencies. Unfortunately, these safety valves are quite narrow. Many taxpayers face APTC repayment because of unanticipated income, including gambling income, retirement account withdrawals, a new job, or unexpected business profits. There is no exception to reconciliation for unexpected income, even if the taxpayer could not have controlled or anticipated the income. If the taxpayer’s annual income turns out to be over the PTC eligibility limit, all APTC must be repaid.

The problem of lump-sum Social Security payments

One of the most sympathetic examples of unanticipated income is lump-sum Social Security Disability. Some people who apply for disability benefits are approved right away based on their initial application, but many are first denied and only receive benefits after a hearing before an Administrative Law Judge. In 2017, the average processing time for an appeal was 602 days, nearly two years. The wait time between an appeal and a hearing varies, but can easily take over a year. It’s very hard for applicants to predict when they will receive benefits. If benefits are approved after an appeal, the initial award often includes payments for earlier years, depending on the date of onset determined by the ALJ. This can result in an initial lump sum payment in the five figures.

An unexpected five-figure jump in income has drastic effects on a taxpayer’s eligibility for the PTC. National Taxpayer Advocate Nina Olson identified this as a serious problem for affected taxpayers in her 2015 Annual Report to Congress and again in her 2017 Objectives Report to Congress. She explains:

When taxpayers receive lump sum Social Security Disability Insurance (SSDI) payments, the additional income may push their household income above 400 percent of the federal poverty line (FPL) for the applicable family size, which will make them ineligible for the PTC. For those taxpayers who received APTC during the tax year, they will need to repay the entire amount because the repayment limitations do not apply if household income is above the 400 percent FPL threshold. … Individuals have little control over how quickly the Social Security Administration will process their disability applications and may even wait years to receive the determination and benefits. Therefore, it is reasonable that many taxpayers did not project to receive the lump sum when applying for the APTC.

(citations omitted). TAS, VITA sites, and LITCs regularly see cases where lump sum SSDI recipients are required to repay large APTC amounts, resulting in significant financial hardship.

In 2016 the NTA asked the IRS Office of Chief Counsel to provide administrative guidance relief for lump sum SSD payments. Senator Angus S. King (I-Maine) also raised the issue to the Secretary of Treasury and the IRS Commissioner. However, in August of 2016

the Office of Legislative Affairs in the Department of Treasury responded to the aforementioned letter from Senator King and indicated that it cannot identify an administrative basis to exclude retroactive lump sum SSDI payments from the calculation of modified adjusted gross income for purposes of the PTC and APTC.

The taxpayer in Johnson v. Commissioner challenged this position with a statutory interpretation argument that income for PTC purposes should not include lump-sump Social Security payments attributable to earlier calendar years. This idea is intuitively appealing on fairness grounds; one of the most frequent PTC questions I see is whether the lump-sum election under section 86(e) can save a taxpayer’s PTC. Unfortunately for affected taxpayers, the Tax Court has now agreed with the Department of Treasury and the IRS on the question: the lump sum election does not help taxpayers.

Johnson v. Commissioner

Mr. Johnson enrolled in a Marketplace plan with premiums subsidized by APTC. Sometime during 2014, he received a lump-sum Social Security payment which included nearly $12,000 in retroactive benefits for calendar year 2013. The IRS argued that the entire Social Security payment counted as MAGI for Mr. Johnson’s 2014 PTC eligibility, putting Mr. Johnson over the 400% FPL cutoff. Mr. Johnson would have been eligible for some PTC if the 2013 benefits were not counted, and his liability to repay excess APTC would have been limited.

Taxation of Social Security payments is determined under IRC 86. Section 86 sets out a formula to determine how much of a Social Security payment will be included in the taxpayer’s gross income. When a taxpayer receives a lump-sum payment, an election under section 86(e) can reduce the taxable portion of the payment. Under the election, the taxability of the funds attributable to earlier calendar years is calculated based on those years’ income rather than normal method of calculating taxability based on the taxpayer’s income in the year of receipt. This is done via worksheets in Publication 915; the taxpayer does not actually amend the prior year’s tax return.

The question in Johnson was whether the definition of Modified Adjusted Gross Income (MAGI) for PTC eligibility includes prior-year SSD payments when the taxpayer makes an election under section 86(e). The Court had to interpret Section 36B:

The term “modified adjusted gross income” means adjusted gross income increased by– … (iii) an amount equal to the portion of the taxpayer’s social security benefits (as defined in section 86(d)) which is not included in gross income under section 86 for the taxable year.

Mr. Johnson argued that section 36B was sufficiently ambiguous to permit the Court to consider the purpose of the Affordable Care Act as expressed by Congress, other legislative history, and public policy consequences of the IRS position. Despite a valiant effort by PT guest blogger Ted Afield who represented Mr. Johnson, the Court finds that the statute unambiguously includes the entire SSD payment received by petitioner.

The textual fight is about the phrase “under section 86 for the taxable year.” Petitioner argues that his taxable year = the calendar year (see section 441), and therefore the payments for the 2013 calendar year are not payments “for the [2014] taxable year.” The Court rejects this argument as contrary to the “established legal principle that a cash method individual generally reports income in the year it is received, even if the benefits are attributable to a prior year,” citing section 451(a) and sec. 1.451-1(a), Income Tax Regs. The Court goes on:

Petitioner’s section 86(e) election simply determined which amount of the lump-sum payment attributable to 2013 should be included in his gross income for 2014. We find that the phrase “under section 86” is not ambiguous and the cross-reference requires the consideration of section 86 in its entirety, including section 86(e).

Mr. Johnson also argued that the legislative history and purpose of the ACA supported his position, and that the IRS’s interpretation leads to an absurd and unintended result, denying an important benefit to someone who was eligible when he applied for APTC and who could not have foreseen the lump sum income. In response, the Court notes that section 36B’s definition of MAGI did not originally include nontaxable Social Security benefits. In 2011 the statute was amended to specifically include nontaxable Social Security. This is undeniable; unfortunately Congress did not address lump-sum payments or the 86(e) election specifically. Certainly the legislative history shows Congress’s intent to include nontaxable SSD that was paid for the tax year, but it is not clear that Congress considered the lump-sum election. Regardless of what Congress considered or didn’t consider, the Court finds the statute clear and thus finds it cannot consider the taxpayer’s equitable and policy arguments, citing Commissioner v. McCoy, 484 U.S. 3 (1987) and McGuire v. Commissioner, 149 T.C. 254.

Taxpayers in Mr. Johnson’s situation are left to hope that Congress will amend the definition of MAGI. Senator King proposed legislation to do this in August of 2018 (S. 3326), but unfortunately his bill died in committee. It will need to be reintroduced to move forward.

MAGI hacks

For taxpayers with unexpected gross income, not all is lost. Some taxpayers can adjust their MAGI to avoid the PTC eligibility cliff, or simply to increase their PTC.

One strategy is to look for adjustments that will lower AGI. Up to April 15, 2019, qualifying taxpayers can make IRA and HSA contributions for 2018, which will lower 2018 MAGI if deductible. With a lower MAGI, taxpayers will be eligible for higher PTC. The IRS issued a Tax Time Guide on IRAs which may be helpful. Taxpayers who established HSAs and who had qualifying high deductible health insurance in 2018 (which can include Marketplace plans) may want to maximize their contributions now. Earlier this week I received a helpful reminder email from my HSA company, letting me know that their deadline for 2018 contributions is 1pm on April 15th.

The financial savings can be very much worth the hassle of a last-minute contribution. The exact calculations will vary depending on the taxpayer’s available Marketplace plans. The following examples use Vermont, since its statewide community rating makes the calculations easy.

Example: Melanie is single with no dependents. Her 2018 MAGI was $48,300. That’s $60 over the income limit for a premium tax credit. Melanie will have to pay back any advance premium tax credits she got from the Marketplace.

Solution: If Melanie contributes $60 for 2018 to a traditional IRA, her MAGI is now $48,240, the maximum to receive a PTC. She now qualifies for a maximum PTC of $1,454, a net gain of nearly $1,400. In addition, she has increased her retirement savings by $60.

For couples and families, the numbers are even more drastic, because of how the credit is calculated. (A family’s expected contribution is smaller relative to the cost of insurance, than is the case for a single person.)

Example: A married couple with MAGI exactly at the 2018 limit of $64,960 (for a household of 2) has a maximum PTC of $5,922. If the couple’s MAGI were even one dollar over the limit, their PTC is zero and they must repay all APTC received.

Even if the couple is income-eligible, it may be advantageous to minimize their MAGI to the extent possible because the PTC is income-sensitive, even at higher levels.

Example: If one spouse in the last example makes an IRA contribution of $5,000, the couple’s maximum PTC becomes $6,400. That’s $478 in “free money” for making an IRA contribution.

Of course, not all taxpayers will be eligible to make a deductible IRA contribution and not all taxpayers will qualify to make an HSA contribution. Also, this strategy is only possible if the taxpayer is below or within spitting distance of the 400% FPL cutoff. The maximum IRA or HSA contribution is not always high enough to bring MAGI under the cutoff. However, these options are worth fully exploring when your client is facing the prospect of repaying APTC.

Getting to Meaningful Court Review in Collection Due Process Cases: Designated Orders, February 25 – March 1, 2019

There were three designated orders for the final week of February 2019, and all of them concerned Collection Due Process (CDP) cases. Two of the orders (Savanrola Editoriale Inc. here and McDonald here feature the time-honored determination that it is not an abuse of discretion for the IRS to sustain a collection action when the taxpayer refuses to provide financial information or otherwise take any part in CDP hearing. The orders are not particularly novel in that regard, but they do provide a good contrast to the third order where the Court actually finds against the IRS and remands to Appeals.

read more…

Since abuse of discretion is a fairly vague standard, even the easy cases can be useful. Savonrola involves a taxpayer that wanted to challenge the underlying tax liability leading to the notice of federal tax lien (NFTL). However, apart from requesting a CDP hearing (blaming a faulty 1099-Misc for the liability) and then petitioning the court after receiving the determination sustaining the NFTL, it does not appear that the taxpayer engaged in the process much at all. The order does not reference any content from the CDP hearing itself, and it is not clear if the taxpayer engaged in the one that was offered. At the very least, the taxpayer does not appear responsive to the Tax Court once the petition was filed -the case was on the verge of being dismissed for failure to respond to an order to show cause. Because the taxpayer made no showing (and raised no argument) that they should be able to argue the underlying liability under IRC 6330(c)(2)(B) the Court had an easy time disposing of the case.

In McDonald the taxpayer did engage a bit more, but still not enough to give themselves a chance of winning on review. Here, the taxpayer apparently wanted to enter an installment agreement but had been unable to (which can happen to the best of us). However, the taxpayer had a back-year tax return that was “rejected” (that is, not-processed) by the IRS which complicated matters. At the CDP hearing, IRS Appeals was understandably unwilling to set up an installment agreement without that return being properly filed. Appeals also requested a Form 433-A for the installment agreement -the reasonableness of that request depending a bit more on the terms of the installment agreement being proposed. In response, the taxpayer sent an unsigned 2015 return and a Form 433-A lacking supporting documentation. When the signature and supporting documents were not forthcoming after multiple requests, Appeals rejected the installment agreement request and issued a determination sustaining the levy. As can be guessed, based on the failure of filing compliance alone, the Court had very little trouble finding there to be no abuse of discretion.

One can read the frequent, easy cases of Savonrola and McDonald to mean simply that the taxpayer will lose if they don’t comply with IRS requests during CDP hearings. But there is a deeper lesson to be learned: the Court needs something to look at to see how IRS discretion was exercised. By failing to comply or otherwise engage with the IRS during the hearing, you are building a record for review that can only ask one question: was it a reasonable exercise of discretion for the IRS to request the information in the first place? Almost (but importantly not always) the Court will find requests for unfiled tax returns or financial statements are not unreasonable and, by consequence, there was no abuse of discretion for the IRS to sustain the collection action when the requests were not complied with.

The important difference is that taxpayers may succeed even without providing requested information if they have readily engaged in the process. By so doing, they create a record for the Court to review and, possibly, come to a determination that discretion, properly exercised, would not require the information. The most famous of these cases is Vinatieri v. C.I.R.. In Vinatieri, the taxpayer provided a Form 433-A and demonstrated serious financial hardship and medical issues during the CDP hearing, but acknowledged that she had unfiled tax returns. The financial hardship was obvious, as was the fact that it would be exacerbated by levy. The IRS policy (that back year returns must be filed before releasing a levy under IRC 6343(a)(1)(D)) was not so obvious, and blindly following it was an abuse of discretion. Ms. Vinatieri was, it should be remembered, a pro se low-income petitioner with serious health issues. She is the prototypical taxpayer that CDP is meant to protect before disastrous levies take place. Nonetheless, it is not clear she would have prevailed (especially not in a “record-rule” jurisdiction) had she not engaged with the IRS at the hearing.

CDP hearings can also help the more affluent (and represented) taxpayers on non-equitable grounds -and again, engaging is key. Sometimes, a taxpayer may not have to comply with an IRS request for information by adequately showing that the information is unnecessary -for instance, where updated financials are cumulative, because the real issue is a matter of law (See the earlier designated order from McCarthy v. C.I.R., here). When you turn the inquiry into a question of law (not always an easy, or possible task with low-income taxpayers) you change the Court’s rubric. And that is exactly what happens in the third and final designated order of the week

Tax Court to IRS: High School Math Rules Apply. Show Your Work or Face Remand. McCarthy v. C.I.R., Dkt. No. 21940-15L (here)

We’ve blogged briefly about Mr. McCarthy before. The case boils down to whether the petitioner or a trust is the real owner of two pieces of property. If petitioner owns it his collection potential should be upwardly adjusted and the IRS rejection of his Offer in Compromise (or partial pay installment plan) likely constitutes a reasonable exercise of discretion. The issue, then, is mostly legal: does the trust own the property, or is the trust merely the petitioner’s “nominee”?

When the issue before the Court is a question of law, the vagueness of “abuse of discretion” goes largely out the window. It is always an abuse of discretion to erroneously interpret the law at issue (See Swanson v. C.I.R., 121 T.C. 111 at 119 (2003)). McCarthy, however, involves a slightly different lesson: it isn’t necessarily that the IRS erroneously interpreted the law (thereby reaching the wrong determination). It is that the IRS didn’t sufficiently back up the determinations it did reach.

The IRS tried to determine whether the petitioner was the true “beneficial owner” of the properties in the trust by analyzing how the petitioner and trust actually treated the property. The first property at issue (the “Stratford” property) was rented out to a corporation (American Boiler) that was apparently controlled by the petitioner. American Boiler made rental payments to the trust for many years, though in apparently inconsistent amounts.

The IRS believed this string of relationships, peculiar circumstances, as well as the fact that there was no written lease agreement between American Boiler and the trust, adds up to nominee. But the Court sees some gaps between those circumstances and the ultimate conclusion. The Court characterized the argument as “inviting us to speculate that petitioner caused the Trust to use in some fashion for its own benefit the rental income it received from American Boiler.” In other words, the IRS hasn’t adequately shown how they get from point A to point B, and their failure to show their work is fatal. The Tax Court “will not indulge in such speculation.”

The IRS fares no better with the second piece of property (the “Charlestown” property). This time, the IRS inferences seem even more threadbare. The trust (with petitioner as trustee) purchased the Charlestown property. The IRS argues that it was “reasonable for [the Settlement Officer] to have inferred that the funds to purchase the Charlestown property must have come from petitioner.” Unfortunately, there are other beneficiaries (apart from petitioner) of the trust that may have led to other contributions to it, even aside from the aforementioned rental income the trust received. Accordingly, the Court finds no basis for the IRS determination that petitioner was the beneficial owner of the Charlestown property as well.

The point isn’t that the IRS was clearly wrong that the trust was not the nominee of the petitioner (it may very well be his nominee: he hasn’t exactly been a “good actor” in other tax matters –the first footnote of the order mentions his involvement in a criminal tax case).  The point is that the IRS did not do its job in showing how they reasonably came to that conclusion apart from general inferences, which was the issue put before the Court. The taxpayer here may well be the polar opposite of Ms. Vinatieri: represented by counsel, likely affluent (at one time or another), and without the cleanest of hands. But like Vinatieri, (and unlike McDonald or Savonrola) they succeeded by engaging in the process and presenting a question (and record) the Court could reasonably rule in their favor on.

Financial Disability Argument Loses Because Taxpayer Husband Did not even Allege Disability

We have written several posts about the financial disability provision set forth in IRC 6511(h) which allows a taxpayer to file a refund claim after the normal statute of limitations has expired if the taxpayer missed the deadline because of a disabling condition. Some of the prior posts are here, here and here. Taxpayers have a long string of losses in the decided cases and the case of Rhandall Thorpe et ux. v. Dept. of Treasury et al.; No. 2:18-cv-04956 (D. N.J. 2019) adds to the list of taxpayer losses. As with the majority of reported cases, these taxpayers proceeded pro se. Based on the facts set out by the court, they would have benefited from the advice of counsel but the benefit may have been conceding their case earlier in the process.


The Thorpes filed returns for several years in which they self-reported the penalty for an early withdrawal from an IRA. At some point long after the expiration of the period for timely filing a refund claim, the Thorpes discovered that they need not have paid the penalty for making an early withdrawal from their retirement account and they sought to recover the payments that they made. The IRS denied their claims as untimely and they brought a suit for refund in district court.

As we have mentioned before in discussing these cases the IRS has not written any regulations in the two plus decades since IRC 6511(h) was enacted but it issued Rev. Proc. 99-21 setting out what it thought taxpayer should show in order to meet the requirements of IRC 6511(h). The Rev. Proc. requires that the taxpayer provide:

(1) a written statement by a physician (as defined in § 1861(r)(1) of the Social Security Act, 42 U.S.C. § 1395x(r)), qualified to make the determination, that sets forth:

(a) the name and a description of the taxpayer’s physical or mental impairment;

(b) the physician’s medical opinion that the physical or mental impairment prevented the taxpayer from managing the taxpayer’s financial affairs;

(c) the physician’s medical opinion that the physical or mental impairment was or can be expected to result in death, or that it has lasted (or can be expected to last) for a continuous period of not less than 12 months;

(d) to the best of the physician’s knowledge, the specific time period during which the taxpayer was prevented by such physical or mental impairment from managing the taxpayer’s financial affairs; and

(e) the following certification, signed by the physician:

I hereby certify that, to the best of my knowledge and belief, the above representations are true, correct, and complete.

(2) A written statement by the person signing the claim for credit or refund that no person, including the taxpayer’s spouse, was authorized to act on behalf of the taxpayer in financial matters during the period described in paragraph (1)(d) of this section. Alternatively, if a person was authorized to act on behalf of the taxpayer in financial matters during any part of the period described in paragraph (1)(d), the beginning and ending dates of the period of time the person was so authorized.

The Thorpes basically complied with none of the requirements set out by the IRS in the Rev. Proc. They also did not attack the Rev. Proc. and argue that the requirements in the Rev. Proc. were not entitled to deference since the IRS did not go through notice and comment in adopting the requirements listed there. Based on their facts such an argument would have been unavailing since they only argued that Mrs. Thorpe had a medical condition and made no effort to show why Mr. Thorpe could not have addressed the claim for refund sooner. In the paragraph setting out its conclusions the court summed up the weak facts in the case very nicely:

The plaintiffs have never complied with these requirements. First, they claim disability only as to Ms. Thorpe; for all that appears here, there is no impairment that prevented Mr. Thorpe from managing the couple’s affairs, and no showing was made to the IRS that he could not. See 26 U.S.C. § 6511(h)(2)(B) (no tolling where “individual’s spouse or any other person is authorized to act” for the person in financial matters).7 Second, they supply three letters from a physician, Dr. Martin Mayer, regarding her condition (DE 1-2, 1-3) These relate certain ailments, but they do not state anywhere that Ms. Thorpe was or is unable to manage her financial affairs, and they do not include the certification required by Rev. Proc. 99-21. Third, there is no indication that the required showing was made in connection with the refund claims themselves, as opposed to here in court. See Chan v. Commissioner, 693 F. App’x 752, 756 (10th Cir. 2017) (“The district court cannot make a determination of financial disability if [the taxpayer] did not first provide the requisite proof to the IRS.”). Fourth, I observe that this claim of medical disability is an anomalous one. The plaintiffs do not claim they were unable to deal with their financial affairs and file their returns; indeed, they did file their returns, using a paid preparer. Their claim, then, is not one of inability to cope with the demands of financial recordkeeping or filing, but merely that their returns contained a mistake.

This was a case that should never have been filed. Although the loss adds to the tally of taxpayer losses in IRC 6511(h) cases, the DOJ attorney would have expended little effort in preparing the responsive pleadings and motion to dispose of this case.

Problems exist with the Rev. Proc. which were exposed in the Stauffer, Kurko and Milton cases discussed here. Taxpayers with legitimate reasons for failing to meet a refund filing deadline should look to those cases in crafting arguments in support of IRC 6511(h) relief and should not be cowed by failures to follow all of the rules the IRS created 20 years ago without notice and comment and which do not internally make sense. The Thorpes’ problem was a basic problem with the statute because Mr. Thorpe provided no evidence of his disability and poor evidence of his wife’s. The case stands for little more than the statute means what it says. Future litigants who fail to provide evidence of the disability of all parties who could fix the mistake should expect similar results. Parties with real disability claims should continue to pursue their claims and litigate the intent of IRC 6511(h) if the IRS denies their claim administratively based on the narrow rules set out in Rev. Proc. 99-21.



Seeking a Federal Tax Refund via Habeas Corpus – Reminder of the Injured Spouse Remedy

In the recent case of Turner v. United States, (N.D. Cal. 2019) a prisoner sought to obtain a refund of money for his wife using the remedy of habeas corpus. Mr. Turner’s effort to obtain the refund through this process failed but in his predictable failure a few points can be made about the process. The main point that jumped out from the case concerns the issue of injured spouse relief. In reading the case I did not get the impression that the judge was aware of injured spouse relief. This makes sense because the judge is a district court judge. It also did not appear that the DOJ Tax Division attorney mentioned it though any mention may have been made informally. In case we have any readers who are unaware of injured spouse relief, I thought I would briefly review the grounds for this relief since this is the time of year when such relief is most important. We have written about it before here and here.


Mr. Turner was sent to prison almost two decades ago as a result of a conviction for first degree murder. While in prison he apparently met and married Regina in 2017. She filed a return for that year claiming him as a dependent. The facts as presented in the opinion state that she did not file a joint return although on the facts that would have been the correct filing status and that would have made what happened next easier to understand.

When Mrs. Turner filed her 2017 return, she apparently claimed a large refund which Mr. Turner alleges that the IRS took to satisfy Mr. Turner’s outstanding federal tax liability. I would not expect someone in prison for murder for 20 years to have an outstanding federal tax liability. It is possible that he had another type of liability that comes within the offset provisions and it is also possible that he totally misconstrued the reason the IRS hung onto her refund. Aside from the puzzling aspect of someone in prison so long having a liability, there is the issue that this was not a joint return raising the question of what would have triggered the offset to his outstanding debt.

The court took very little time disposing of the case because habeas corpus relief does not extend to tax refunds. Because it’s so clear that relief could not be granted on the basis requested, I think the court did very little to flush out the correct facts and perhaps untangle the situation for a confused petitioner.

Still, the case can provide a basis for discussing the injured spouse provisions which often confuse taxpayers and occasionally confuse practitioners. Perhaps the best way to avoid injured spouse issues is to carefully vet any prospective marital partner to ascertain what debts the partner brings into the marriage. A partner coming into the marriage with tax debts, student loan debts, outstanding child support or any of the types of debts that trigger offset is a partner for whom the taxpayer must be very careful when filing the tax return. Filing a joint return with someone who owes a type of debt subject to offset means that any refund on the return will be taken and applied to the outstanding debt unless the parties affirmatively alert the IRS that it should not.

The injured spouse provisions often get confused with the innocent spouse provisions of IRC 6015. In an innocent spouse case a married couple has filed a joint return on which they owe more money either as a result of an additional assessment or an underpayment. One of the spouses (sometimes both) seek to limit their exposure to the liability for the reasons provided in IRC 6015. In contrast the injured spouse provisions arise when a married couple files a joint return on which they report a refund due to them. The IRS takes all or part of the refund to satisfy the outstanding debt of one of the spouses, the liable spouse. The non-liable spouse is injured because all or part of the refund results from their payment and the non-liable spouse seeks a return of the portion of the refund attributable to him or her. Unlike the innocent spouse provisions, the injured spouse provisions are a creature of administrative practice and not the statute.

If the refund on the joint return results wholly or partially because of the spouse who does not owe a debt to the government, the spouse who does not owe the debt should file a Form 8379 with the tax return. This means filing the return by paper and waiting a long period for the refund. The extra delay will be worth it if the form prevents the IRS from offsetting the refund of the non-liable spouse. Some taxpayers will not know about the Form 8379 or will not know that they spouse has an outstanding liability. So, the IRS will make the offset and send them a notice of what was done. For the non-liable spouse in this situation whose refund has been partially or wholly taken to satisfy the separate liability of their spouse, the possibility of the return of the money still exists. In this situation the injured spouse should file the Form 8379 after learning of the taking of the refund. The IRS will require the injured spouse to provide the portion of the refund attributable to that spouse. Assuming that the injured spouse can successfully prove to the IRS that all or part of the offset refund was generated by the party with no liability, the IRS will release the appropriate refund to the injured spouse and increase the debt owed by other spouse.

Because the process of requesting injured spouse relief is a bit cumbersome, some spouses take the tack that the safest path with a spouse who owes outstanding debts is a married filing separate return. Using the injured spouse provision, the non-liable spouse can obtain the benefit of the joint return rates while still getting back the refund resulting from their efforts. Of course, if the existence of the other spouse’s debt has caused them to lose confidence in their spouse, opting for a married filing separate return may be best for other reasons.

It’s not clear to me if Ms. Turner has the ability to seek a return of her refund based on the injured spouse provisions but based on the arguments made by her husband she should at least look into the injured spouse provisions to determine if they would form the basis for relief.


Several Things You Should Avoid With Your Taxes: Designated Orders 2/18/19 to 2/22/19

Designated Orders:  Several Things You Should Avoid With Your Taxes (2/18/19 to 2/22/19)

While there was a flood of designated orders immediately after the government shutdown ended, that was the height of the wave.  This week is at low tide for the number of designated orders because there are only four orders to discuss.  While there aren’t too many items of substance to discuss, each order has some interesting points on what to avoid with the IRS or Tax Court.


There’s a Limit on Tax Benefits for Education

Docket No. 2805-18S, Tanisha Laquel Saunders v. C.I.R., available here.

In the past, one of my jobs involved taking questions from tax professionals, doing research, and providing written responses concerning their tax situation.  During that time, I answered several questions concerning tax situations for students.  I grew familiar with IRS Publication 970, Tax Benefits for Education, and used that as a starting point to answer several questions for what would be allowed on particular tax returns.

If you were to read through IRS Publication 970, a theme that you would find is that the IRS does not allow an individual to use the same qualified education expenses to claim multiple tax benefits.

That is the background for the case in question, which comes to us by a bench opinion from Judge Carluzzo.  The petitioner was a full-time student at Los Angeles Pierce College.  She received a Pell Grant to pay tuition and related educational expenses, with the remainder going to personal and living expenses.  The petitioner chose to exclude from her income the portion of the Pell Grant used for qualified education expenses.  This is a correct tax treatment of a Pell Grant with regard to qualified education expenses.

Where the petitioner went wrong is that she also decided to use those expenses for an education credit.  The bench opinion only refers to the education credits allowed under Internal Revenue Code (IRC) section 25A.  While the type of credit is not named, it was likely an American Opportunity Credit since the petitioner claimed both a nonrefundable and a refundable portion of the credit.

The judge does “congratulate and commend petitioner on pursuing her formal education”, but that does not prevent him from applying the law to the case.  The judge sustains the IRS disallowance of the section 25A education credit, deciding in favor of respondent.

Takeaway:  You are not allowed to double-dip when it comes to education-related tax benefits on the same expenses.  Perhaps the petitioner could have used better tax planning by making the Pell Grant full taxable and then taking an American Opportunity Credit.  Where she got caught by the IRS was where she excluded the Pell Grant from income, but also claimed the education credit.  A taxpayer just cannot get two or more tax benefits from the same education expenses.


The Petitioner’s Representative

Docket No. 14578-18SL, Barry J. Smith v. C.I.R., available here.

I don’t have too much to say on this case.  It is another example of a petitioner with a Collection Due Process (CDP) case who did not do much before the IRS filed a motion for summary judgment, leading to a decision for the IRS.

What caught my eye was a paragraph on the petitioner’s history.  It stated that the petitioner’s representative asked for additional time to provide financial materials on the date that they were due (and got an extension).  Next, when the settlement officer attempted to contact the representative for the scheduled telephone conference, there was no answer.  The settlement officer left a message, stating no information had been received and a notice of determination would be issued sustaining the proposed levy.  Later that day, the representative called back, explaining that his paralegal had been out.  The representative indicated he planned to speak with petitioner the next day and hoped promptly to get back to the settlement officer with the required information.  Nothing further was heard from the petitioner or his representative and no materials for consideration were submitted.

Takeaway:  While we do not have the full story, my read on the situation is that the petitioner’s representative might also have been at fault.  Whether that is the case or not, it is best if a petitioner’s representative helps the petitioner instead of adding to the case history of non-responsiveness to the IRS.


How Not to Deal With Tax Fraud

Docket No. 1395-16 L, Harjit Bhambra v. C.I.R., available here.

The IRS issued a Collection Due Process determination to sustain the filing of a notice of federal tax lien for restitution-based assessments and fraud penalties related to tax years 2003 and 2004.  Petitioner appealed to the Tax Court. The Tax Court granted an IRS motion for summary judgment with respect to the restitution so what was at issue in this order was petitioner’s liability for the fraud penalties (the petitioner was able to have a CDP hearing regarding his liability because the liability was not subject to deficiency procedures).  The Court issued an order remanding the case to IRS Appeals for a supplemental hearing where the petitioner could raise a challenge to the determination of the fraud penalties.

The Appeals Officer then sent a letter scheduling a telephone conference and the petitioner replied with his own letter.  That letter demanded an in-person hearing that he would record, plus he also made inflammatory statements, such as “that the IRS agents are well qualified liars that cannot be trusted for any reason” and the District Court judge in his criminal trial is a “reckless buffoon”.  Again, he submitted no evidence against the civil fraud penalties.  After a telephone conference, the petitioner again did not submit anything to refute the penalties.

In the IRS supplemental notice of determination, Appeals found the Examiner was correct to assert IRC section 6663 penalties because all or part of the underpayment was due to fraud, the petitioner was criminally convicted per IRC section 7206(1) and 7206(2) for making a false tax return, and he presented no new evidence why he is not liable for the penalties.

After receiving the parties’ status reports and the supplemental notice of determination, the Tax Court tried to reach out to the parties to see how to proceed.  They were unsuccessful in December 2018, which was followed by the government shutdown, with no success reaching the petitioner at the beginning of February 2019.  On February 11, petitioner did not answer his phone at the agreed-upon time.  In response to attempts to reschedule the call on February 13, petitioner responded:  “I’m working on February 13, 2019, and vacationing from 2-14-19 to March 8, 2019, please send me in writing whatever the [judge] has for this case.”

In this order, the judge’s response is:  “We will take petitioner up on his invitation.  We assume that, in asking for us to send whatever we have in writing, petitioner seeks no further hearing and has no argument to make.”  The judge sees no reason why decision should not be entered for the IRS to continue with collection of the restitution amount and the civil fraud penalties for 2003 and 2004.  The petitioner is ordered to show cause on or before March 19, 2019, why there should not be a decision entered as described.

Takeaway:  I always find that politeness and responsiveness go a long way to helping a court case.  The petitioner might not have avoided a decision against him, but it would not have hurt.


“No Trade or Business” or Cause for Alarm

Docket No. 8724-18 L, Jeffrey P. Heist v. C.I.R., available here.

Mr. Heist owned and operated US Alarm Systems, an alarm system installation and servicing business.  For 2013 and 2014, he worked as a sole proprietor and filed a Schedule C on his tax returns to report his income.  For 2015, Mr. Heist conducted his business through an S corporation and reported that income on Part II of Schedule E on his tax return.  He had no other source of income than that alarm system business during those years.  During those years, his customers used forms 1099-MISC to report payments they made to the business.

Mr. Heist filed tax returns for those years with a CPA on September 1, 2016.  He reported either net profit on Schedule C or S corporation income on Schedule E, respectively, along with tax and penalties (including self-reported estimated tax penalties).  He did not make estimated tax payments, had no payments as offsets against the tax or penalties and did not submit payment with the returns.

The IRS processed the returns and the amounts owing went unsatisfied, so the IRS sent a notice of intent to levy and notice of lien filing.  This prompted him to amend his tax returns for the years in question.

How did Mr. Heist choose to amend those returns?  He reduced his income, tax and penalties to zero for all three tax years.  In support, he attached “corrected” Forms 1099-MISC he created, purporting to “correct” to zero the amounts of income paid by the customers of his alarm system business.

What is Mr. Heist’s justification for these amendments? His main argument is that he and US Alarm Systems performed no “trade or business” activities as defined in USC Title 26 Section 7701(a)(26).  That defines the term “trade or business” to include performance of the functions of a public office, which Mr. Heist reads to exclude any other activities. The order cites multiple Tax Court Memorandum Opinions that have found this argument to be baseless and frivolous.

Not surprisingly, the IRS deemed the amended returns frivolous and invalid, eventually assessing frivolous return penalties under IRC 6702(a).  The IRS sent new notices of intent to levy and of filing a federal tax lien, and Mr. Heist requested a CDP hearing.  In the request, he states:  “I submitted simple arithmetic and sworn rebuttals to erroneous information returns and bad ‘payer’ data sent to IRS by those I contracted with for the years in question.  I made no claims for refund, overpayment or credit.  I simply require the record be corrected.”

Mr. Heist was not asking for money from the IRS, so what’s the harm, right?  Mr. Heist maintained at the telephone hearing and throughout the administrative process that he did not submit a frivolous return justifying any penalties.  Other things he did not do were request any collection alternatives, provide any documents in support of alternatives, or argue that the tax lien should be withdrawn.

On April 25, 2018, the IRS issued a Notice of Determination sustaining the penalty assessments, the notice of lien, and the proposed levy.  Mr. Heist timely appealed to the Tax Court, maintaining the same arguments.  The IRS filed a motion for summary judgment which the petitioner opposed.

The Court analyzed the case and found that the frivolous return penalties were justified and the settlement officer did not abuse her discretion.  The IRC 6702 penalties are $5,000 for each of the three tax years at issue.  The IRS’s motion for summary judgment was granted because there was no genuine dispute of material fact.

In addition, the Court advised the petitioner of IRC section 6673(a)(1), which authorizes the Tax Court to impose a penalty up to $25,000 when it appears proceedings have been instituted or maintained primarily for delay or that a position is frivolous or groundless.  The IRS did not seek such a penalty and the Court decided not to impose it sua sponte.  However, the Court warns Mr. Heist that they may not be so forgiving if he returns in the future to advance frivolous and groundless arguments.

Takeaway:  Mr. Heist originally had a tax liability over $20,000.  For some reason, he got it in his head to amend those returns and change the Forms 1099-MISC as if everything filed with the IRS for 2013 to 2015 related to his business did not exist.  This bright idea didn’t quite double his IRS debt, but brought $15,000 more in IRS penalties and a stern warning from the Tax Court about further penalty if he returned there again with frivolous arguments.  Let this serve as an example of actions to avoid with the IRS and the Tax Court.

Damages for Lost Tax Documents = Refund Claim?

We welcome back guest blogger Sarah Lora, Supervising Attorney of the Statewide Tax Project of Legal Aid Services of Oregon. Today Sarah (with the help of 3L Katelynn Clements of Lewis and Clark Law School) examines a recent federal district court decision from Colorado. She argues that the court wrongly categorized a tort claim against the Transportation Security Administration as a tax refund claim, and so should not have dismissed the case for lack of jurisdiction. As we have discussed before on PT, the prerequisites to a successful tax refund suit are insurmountable for many taxpayers. Sarah points out that the taxpayer here may actually have a chance with the IRS. The record does not tell us if he’s tried that route yet. Christine

If the TSA removes from luggage and negligently misplaces tax papers that are essential to prove your claim for refund, sorry friend, you are out of luck. This, according to the federal district court in Schlieker v. Transportation Safety Administration, is the state of the law.


On February 17, 2016, Mr. John Schlieker flew from Phoenix to Denver on Southwest Airlines. According to his complaint and documents attached to it, Mr. Schlieker checked luggage that contained “a multitude of green hanging files containing manila folders filled with documenting receipts, paperwork, check registers, charitable contribution receipts, medical and dental receipts, property interest confirmation; all the things needed to appropriately file [his 2015] tax return.” When he arrived in Denver, instead of those documents, Mr. Schlieker found a TSA notice of bag inspection stating that his bag “was among those selected for physical inspection.”

On May 19, 2016, Mr. Schlieker filed a claim for damage with the TSA for $5,000, representing the amount of refund he estimated he could have obtained had the TSA not misplaced his papers. TSA sent Mr. Schlieker a letter on December 1, 2016 denying his claim “after careful evaluation of all the evidence” and directing him to file a lawsuit in U.S. District Court if he was dissatisfied with the denial. Mr. Schlieker was dissatisfied. He then filed a lawsuit in the U.S. District Court for the District of Colorado against the TSA under the Federal Tort Claims Act for $5,000.

The court dismissed the lawsuit holding it lacked subject matter jurisdiction because Mr. Schlieker did not claim the refund with the IRS first. Assuming that the allegations in his complaint are true, as the law requires when considering a motion to dismiss, the papers that the TSA lost were necessary to file a claim for refund. Mr. Schlieker stated in his complaint that he could not “completely, honestly, and truthfully” sign a return claiming the refund without the papers the TSA took. How could he file a claim for tax refund when the TSA took the very documents he needed to assert the claim?

Mr. Shlieker’s actions are not unique. In many cases, even for sole proprietorships, a taxpayer may not keep any “books” detailing their profits, losses, or expenses. Instead, the taxpayer will save receipts and other records throughout the year which they then give to their tax preparer every April. This is not ideal, but it happens routinely.

Citing I.R.C. § 7422(a) and a long list of cases dismissing suits based on that statute, the court reasoned that Mr. Schlieker’s lawsuit was really a claim for a tax refund and should therefore be dismissed. The statute reads:

No suit or proceeding shall be maintained in any court for the recovery of any internal revenue tax alleged to have been erroneously or illegally assessed or collected . . . or of any sum alleged to have been excessive or in any manner wrongfully collected, until a claim for refund or credit has been duly filed with the Secretary [of the Treasury], according to the provisions of law in that regard, and the regulations of the Secretary established in pursuance thereof.

The cases the court cites, which cite this statute as the reason for their decision to dismiss, fall into two inapposite categories. The first are cases in which a third party, either an employer or an airline, is acting as an agent of the IRS to collect and pay over taxes. In those cases, the courts have held that § 7422(a) protects those agents, who are required by statute to collect taxes for the government under threat of criminal penalty for failure to do so, from civil lawsuits relating to the collection of those taxes. Sigmon v. Southwest Airlines (dismissing class action against Southwest for improperly charging excise taxes to passengers); see also Kaucky v. Southwest Airlines (same); Chalfin v. St. Joseph’s Healthcare Sys. (dismissing case against employer who improperly withheld FICA from medical residents working at a hospital).

In Mr. Schlieker’s case, the TSA was not acting as an agent of the IRS to collect and pay over taxes. It did not confiscate Mr. Schlieker’s documents in order to perform some duty it believed it owed to the IRS. Assuming the allegations in the complaint are true, the TSA committed a tort, plain and simple, when it took Mr. Schlieker’s documents out of his luggage and did not return them. For that reason, those agency cases are not persuasive.

The second group of cases hold that plaintiff must timely exhaust administrative remedies, by filing a claim for refund, prior to filing suit for the refund of taxes. See United States v. Clintwood Elkhorn Mining Co; United States v. Dalm; Strategic Hous. Fin. Corp. v. United States. The court misses the mark with this line of cases as well. TSA, by means of tortious conduct, took the means for filing a claim for refund away from Mr. Schlieker. To require Mr. Schlieker to file a return without supporting documents violates the letter of IRC §7206(1):

any person who . . . [w]illfully makes and subscribes any return, statement or other document which contains or is verified by a written declaration that it is made under the penalties of perjury, and which he does not believe true and correct as to every material matter . . . shall be guilty of a felony. . . .

In reality, even if Mr. Schlieker’s claim survived the initial motion to dismiss, he still might have lost or received only limited damages. In a case like this, TSA may argue that its seizure of the records was not the proximate cause of Mr. Schlieker’s loss. After all, with today’s technology, could he not have reconstructed his records well enough to file his tax return? Copies of bank records, dental and medical bills, mortgage interest paid, etc. are likely readily available online. I do not see much in the multitude of green hanging files that he could not replace with some headache and hassle. It is possible he could still get those documents and file his claim for refund before April 15, 2019. Perhaps the damages in a case like this should be measured by the cost to replace the documents, a reasonable estimate of the lost refund attributable to any irreplaceable documents, and perhaps any non-economic damages such as emotional distress.

A Burden of Proof Primer and Two Trips into the TEFRA Thicket – Designated Orders: February 4 – 8, 2018

The Tax Court designated nine orders this week; we’ll discuss three here. The others included two fairly routine orders granting motions for summary judgment in CDP cases; another reminder that parties can’t use Rule 155 computations to alter substantive litigated issues; a cryptic order from Judge Carluzzo in a case we previously covered, which seems to suggest that these pro se petitioners disagreed with Judge Carluzzo’s denial of their motion to dismiss for lack of jurisdiction; and a pair of orders from Judge Leyden, one of which warns of a section 6673 penalty.


Docket Nos. 15265-17S, 25142-17S, Pagano v. C.I.R. (Order Here)

Judge Carluzzo issued a bench opinion in Pagano, upholding Respondent’s changes to Petitioner’s 2014 and 2015 income taxes in a Notice of Deficiency, along with an increased deficiency that Respondent desired after the NOD was issued. Petitioners made this all the easier on Respondent when they failed to appear for trial.

While the opinion is run-of-the-mill, it provides a useful distinction between the various burden of proof rules that can apply in Tax Court. Usually, Petitioner bears the burden of proof—including the burden of producing evidence and the ultimate burden of persuasion—in any Tax Court case. The Notice of Deficiency is “imbued with a presumption of correctness”; in other words, if Petitioner puts on no evidence, then Respondent’s changes in the NOD are upheld.

This dynamic shifts, however, where (1) Respondent raises a “new matter” that is outside the scope of the Notice of Deficiency, or (2) the NOD provides for an adjustment based on unreported income. In the former case, because the new matter was not contemplated at the administrative level, Respondent must both raise the issue and provide foundational evidence to support such an adjustment. For unreported income, the Tax Court has repeatedly held (as Caleb Smith discussed previously) that Respondent cannot rely on a “naked assessment” regarding unreported income. Otherwise, taxpayers are forced to prove a negative. Instead, Respondent must first link the taxpayer to an income producing activity.

In Pagano, the substantive issues included overstated Schedule C deductions for 2014 and 2015, and understated Schedule C income for 2015.

The Petitioners lose on the deductions for both years under the general principle that the petitioner carries the burden of proof. Missing trial is a good way to fail to carry that burden.

In contrast, Respondent had some work to do on its adjustment for understated Schedule C income—not much work, but Respondent needed to do more than simply showing up to trial, sitting on its hands, and saying “we win.” Nevertheless, Respondent still wins. Because Respondent introduced evidence to connect Petitioners to an income producing activity—namely, Petitioner’s tax preparation business—its adjustments regarding unreported income were likewise upheld. It helped that Respondent also seems to have provided evidence to justify the underlying adjustments, but I’m not sure that would have been necessary with absent petitioners.

Finally, Respondent seems to have concluded that the Service’s earlier bank deposit analysis on unreported income was somewhat off. Therefore, Respondent sought an increased deficiency from that reported in the NOD. Here too, Judge Carluzzo finds that Respondent satisfied its independent burden in raising this new matter, through the bank deposit analysis that Respondent entered into evidence, along with a revenue agent’s testimony.


Docket No. 23017-11, Hurford Investments No. 2, Ltd. v. C.I.R. (Order Here)

This order from Judge Holmes comes on a motion for extension of time to file a motion to reconsider Judge Holmes’ prior order denying Petitioner’s motion for reasonable litigation and administrative costs under Rule 231. That order, which Judge Holmes issued on December 21, 2018 and did not designate, disagreed with the Court of Federal Claims’ decision in BASR Partnership v. United States, 130 Fed. Cl. 286 (2017), that partnerships could submit Qualified Offers under section 7430(c)(4)(E)(i). In this order, Judge Holmes explains his disagreement with the Court of Federal Claims in detail.

Hold on a second. Did an undesignated order just create a split of authority between the Tax Court and the Court of Federal Claims?

Well, not necessarily. Orders are, under Tax Court Rule 50(f), non-precedential. Other judges in the Tax Court might reach a different result. Of course, a partnership shouldn’t expect to return to Judge Holmes with an identical argument and hope to win; he’s likely to apply the same logic as in Hurford Investments.

After losing their motion for fees and costs, Petitioners planned to move for reconsideration. But their counsel knew that the decision in BASR Partnerships—which the Service appealed to the Federal Circuit—would soon be forthcoming. Indeed, the Federal Circuit issued their opinion on February 8, as we covered here. So, Petitioners moved on January 17 for an extension of time to file their motion for reconsideration, such that the Tax Court could consider any subsequent opinion from the appellate court.

Judge Holmes denied the motion for an extension of time, noting that there were alternative grounds for decision, which the Federal Circuit was unlikely to reach. I initially had some trouble seeing that argument. The grounds for decision were (1) that Hurford wasn’t a prevailing party in the traditional sense because Respondent’s litigating position was substantially justified, and (2) that Hurford couldn’t make a Qualified Offer as a matter of law. Presuming the first point is correct (a fair assumption, given the novelty of the underlying case), the Court must still find that Petitioner was prevented from submitting a qualified offer. Let’s take a look at the statute and Judge Holmes’ analysis.

Section 7430 authorizes reasonable litigation costs where the taxpayer is the “prevailing party,” which means (1) that the taxpayer won a litigated case, and (2) that the IRS litigating position was not “substantially justified.” See I.R.C. § 7430(c)(4)(B). However, a taxpayer can avoid the “substantially justified” provision if the taxpayer submits a “qualified offer”, as defined in the statute, and if “the liability of the taxpayer pursuant to the judgment in the proceeding . . . is equal to or less than the liability of the taxpayer which would have been so determined if the United States had accepted a qualified offer . . . .” I.R.C. § 7430(c)(4)(E)(i).

In turn under section 7430(g), a “Qualified Offer” is:

  • A written offer;
  • Made by the taxpayer to the United States;
  • During the qualified offer period;
    1. Beginning on the date the first letter of proposed deficiency which allows the taxpayer an opportunity for administrative review is sent
    2. Ending on the date which is 30 days before the date the case is first set for trial;
  • Specifies the offered amount of the taxpayer’s liability;
  • Is designated at the time it is made as a qualified offer for purposes of section 7430; and
  • Remains open during the period beginning on the date it is made and ending on the earliest of the date the offer is rejected, the date the trial begins, or the 90th day after the date the offer is made.

However, section 7430(c)(4)(E)(ii) provides that a qualified offer isn’t available in “any proceeding in which the amount of tax liability is not in issue….” Judge Holmes previously found that this was such a case. The ultimate tax liability is not calculated at the partner level in a TEFRA proceeding; instead, the tax liability of the partners is separately calculated, and can depend upon individual circumstances independent of those addressed in the TEFRA proceeding.

Further, Judge Holmes found that Hurford Investments wasn’t even a “taxpayer” under section 7430, because it has no ultimate tax liability that is calculated, and so couldn’t even make an offer as required under 7430(g)(2).

Similarly, Judge Holmes suggests Petitioner didn’t comply with section 7430(g)(4), which requires taxpayers to specify the amount of the taxpayer’s liability.  Hurford Investments couldn’t have done so, Judge Holmes suggests, because they had no liability as a partnership.

Finally, the regulation interpreting this section requires the taxpayer to “clearly” make their qualified offer, and also requires that it be “with respect to all of the adjustments at issue” and “only those adjustments.” 26 C.F.R. § 301.7430-7(c)(3). Judge Holmes seems to state that because offered the adjustments at the partnership level flow through to the partners—i.e., that Hurford Investments’ proposal wasn’t limited to only its tax liability, but extended to their partners—this wasn’t a proper “qualified offer” under the regulation.

This latter point must be the “alternative grounds” upon which Judge Holmes denied the motion for an extension of time. All other grounds that Judge Holmes rejected stem from the premise that Hurford Investment didn’t have a tax “liability” and, relatedly, that the tax liability cannot be at issue in a TEFRA proceeding.

As it happens, the Federal Circuit issued their opinion shortly after this order, after which Petitioner filed a motion for reconsideration. We’ll continue to wait and watch this not-yet-ripe split of authority develop.


Docket No. 10201-08, BCP Trading and Investments v. C.I.R. (Order Here)

Finally, this order provides an example of the Court addressing a gap in the rules in an interesting context. Judge Holmes decided this TEFRA case in 2017 (T.C. Memo. 2017-151). Turns out, an indirect partner didn’t participate in that litigation. When parties to a partnership action settle, Rule 248(b)(4) requires Respondent to move for entry of decision; the Court then must wait 60 days to see if any nonparticipating party objects to the settlement. The Rule exists to provide the nonparticipating, though very affected, party one last shot to participate in final disposition of the case.

There’s no similar rule, however, where the case is litigated. Indeed, the equity interests are somewhat different here, since the Court is ultimately calling the shots. In this case, the participating parties did agree on the “language of the decisions”—which I take to mean the decision documents that will ultimately resolve this docket after Judge Holmes decided the substantive issues in 2017.

So, it appears, the parties and Judge Holmes felt that this nonparticipating party needed a chance to voice its opinion on this final decision. As such, the Court served the proposed decision on the partner (an estate), and issued an order to show cause why the Court shouldn’t enter that decision. They used the procedures in Rule 248(b)(4), and so provided the estate with 60 days to respond.

The estate responded and filed a motion for leave to intervene. Petitioner consented to the motion, but Respondent objected, arguing that the motion was untimely and otherwise inappropriate on the merits.

Judge Holmes finds that the motion to intervene was timely; it was timely made in response to the bespoke procedure that the parties created in this case to provide the estate with notice and an opportunity to respond. Even though the motion would be untimely under Rule 245 (which generally governs motions to intervene in TEFRA cases), Respondent had already agreed to these new procedures in this case.

On Respondent’s second argument, however, the estate loses. The estate sought to raise the very same argument that the Court had rejected when the participating parties brought it: that the statute of limitations on assessment barred any additional liability. Thus, Judge Holmes found that the estate didn’t qualify for mandatory intervention, as the participating partners had adequately represented the partners’ collective interests. Permissive intervention was, accordingly, also inappropriate, where relitigating that sole issue would “only further delay its conclusion.”