Protective Orders, New Matters and Other Issues: Designated Orders 4/13/20 to 4/17/20

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There were 5 designated orders during this week from the Tax Court that covered a variety of topics.  The orders themselves were fairly short but covered some interesting points of litigation.  There is no major spotlight here, but each will get some degree of coverage.

Protective Orders

Docket Nos. 24373-18, 13826-19 (consolidated), Martin Lewis & Trina Lewis, v. C.I.R., Order available here.

The petitioners felt they needed a protective order in Tax Court because they have Tax Court cases for tax years 2014 and 2015 yet there is also a revenue agent that issued a summons to Mr. Lewis for calendar years 2012 through 2018.  The IRS objected to the motion for a protective order.

What is going on?  To begin, the deficiencies in the Tax Court cases relate to disallowed captive insurance premiums paid to Cedar Insurance, Ltd in 2014 and 2015.  Cedar Insurance is a micro-captive insurance company domiciled in Nevis.  It was formed and managed by Retained Risk Manager, LLC.  The payments were deducted by the petitioners as a flow through from a Subchapter S Corporation, Lewis, Kaufman, Reid, Stukey, Gattis, & Co., PC.  That is a CPA firm where Mr. Lewis was the managing shareholder.

Following the petitions filed in the Tax Court cases, an IRS revenue agent served a summons on Mr. Lewis requesting him to appear before her in the matter of the IRC section 6700 investigation of Retained Risk Manager, LLC, for 2012 through 2018.


Rule 103 is the Tax Court rule concerning Tax Court protective orders.  The petitioners cited that rule and to Universal Manufacturing v. Commissioner, but the controlling case, as cited by the IRS, is Ash v. Commissioner.  Rule 103 allows the Tax Court to issue orders to protect persons from annoyance, embarrassment, oppression, or undue burden or expense resulting from the use of the Court’s discovery procedures.  Ash allows where Tax Court litigation commenced and an administrative summons would concern another taxpayer or a different tax year, the court would not exercise their inherent power.  They will exercise their power when a petitioner can show there is a lack of independent and sufficient reason for the summons.

With the IRS objection, they included the declaration from the revenue agent, which explains that she is seeking information from Mr. Lewis unrelated to the Tax Court cases.  Also, she has not communicated with IRS counsel of record and he will not attend the summons interview.

The Court was satisfied the summons is independent of the litigation and will hold the respondent to that representation.  If circumstances change or the petitioners have new evidence, the Court may consider the matter anew.  The petitioners’ motion was denied without prejudice.

Takeaway:  I was first surprised as an LL.M. student to learn that there are times that departments in the IRS work toward independent purposes.  With the many departments in the IRS, there are certainly times that they work toward different results or have mixed motives.  This certainly may be one of those times, but I do not blame the Lewises for thinking something smells fishy at the IRS and taking preventative measures against any harassment.

New Matter?

Docket Nos. 13382-17, 13385-17, 13387-17 (consolidated), Adrian D. Smith & Nancy W. Smith, et al., v. C.I.R., Order available here.

The adjustments in these consolidated cases are due to a partnership-level examination of Adrian Smith + Gordon Gill Architecture, LLP, for tax years 2008 through 2010 concerning the disallowance of credits for research activity under IRC section 41.  The petitioners, partners of the LLP, filed a motion to shift the burden of proof, requesting an order shifting the burden of proof with respect to any new matters raised by the IRS regarding reasonable compensation under IRC sections 162 or 174.  The IRS filed their response.

The petitioners argue that the IRS had the sole issue raised during their examinations of whether the research conducted under the sample contracts was “funded research” under IRC section 41(d)(4)(H).  They claim the presentation of expert opinions on reasonable compensation requires different evidence compared to the contractual analysis of funded research that prompted the case.  Their argument is that the issue of reasonable compensation is beyond the scope of the notice of deficiency and constitutes a new matter.

Under precedent, the IRS determination of deficiency is presumed correct and the taxpayer bears the burden of proving it incorrect.  An exception to that rule applies when the IRS raises any new matter in a proceeding.  When the notice of deficiency fails to describe the basis on which the IRS relies to support the deficiency determination and that basis requires the presentation of evidence different than what is necessary to resolve the notice of deficiency’s determinations, the new basis is treated as a new matter where the IRS bears the burden of proof.

Additionally, the objective language in the notice of deficiency remains the controlling factor.  A new position taken by the IRS is not a ‘new matter’ if it “merely clarifies or develops [the] Commissioner’s original determination without requiring the presentation of different evidence, being inconsistent with [the] Commissioner’s original determination, or increasing the amount of the deficiency.”

In the Court’s review, the judge agrees with the IRS argument that the reasonableness of petitioners’ compensation was not a new matter.  The Court notes the objective language of the notices of deficiency at issue were broad, stating that the expenses claimed by the LLP did not qualify for the credit for increasing research activities under code section 41.  The indication to the petitioners was that they would have to provide evidence that it did qualify, leading to the need to provide evidence on how the compensation meets the reasonable research expenditures requirements of code section 174(e). 

The judge states the IRS reasonable compensation argument does not require the presentation of new evidence but merely clarifies or develops the original determination in the notices.  The issue of reasonable compensation is consistent with the original determinations in the notices of deficiency and it does not increase the amount of the deficiencies.  As a result, there is no new matter and the motion to shift the burden is denied.

Takeaway:  I can understand the side for the petitioners here if they were focused on “funded research” in examination and the IRS turns to “reasonable compensation.”  However, the judge believes that the notice of deficiency is broad enough regarding research activities that “reasonable compensation” does not constitute a new matter. 

Other Issues

Docket No. 7421-19, Little Horse Creek Property, LLC, Little Horse Creek, LLC, Tax Matters Partner v. C.I.R., Order available here.

This case is about a charitable contribution deduction claimed by an LLC for a conservation easement.  The IRS filed a motion for partial summary judgment, urging alternative grounds for denying the claimed deduction.  The IRS reasoning is based on contentions including an allegedly impermissible donor improvements clause.  Soon after, they filed a motion to stay proceedings asking that discovery and other pre-trial proceedings be stayed pending resolution of the motion for partial summary judgment.

The petitioner went ahead and filed two requests for admissions, with due dates in April and May of this year.  Both sets of requests were directed primarily to matters the petitioner believes are relevant to the proper disposition of the donor improvements issue.

The petitioner next filed a timely response to the motion to stay proceedings, contending that responses to its requests for admissions will support its defense against the motion for summary judgment and will support a potential cross-motion for summary judgment on one or more issues.

The Court desires to have all relevant material at the same time, to enable the Court to determine whether there exist any genuine disputes of material fact.  Accordingly, they deny the IRS motion to stay proceedings that would relieve the IRS from responding to the two sets of requests for admissions.  They grant the IRS motion to stay proceedings that will defer other forms of discovery until after the disposition of the IRS motion for partial summary judgment and any cross-motion from the petitioner on the donor improvements issue.

Docket No. 18748-18, Pengcheng Si v. C.I.R., Order available here.

After a trial in this case, the Court decided for the IRS and sustained the disallowance of deductions for other expenses, meals and entertainment, and legal and professional services.  Mr. Si filed a motion for reconsideration regarding the legal and professional services.

The legal and professional expenses are from a qui tam action filed in 2009 against a former employer under the False Claims Act that did not conclude until 2018.  Mr. Si paid $19,737 to an attorney in 2015 for legal work and the action underlying those fees was dismissed with prejudice in 2018, with no indication of any award or settlement proceeds paid in 2015.

The Court previously held that IRC section 62(a)(20) prevents deductions in excess of proceeds includible in gross income from an action brought under the False Claims Act.  Since there were no proceeds paid, the deduction is disallowed.  As the motion for reconsideration does not address that statute, it is denied.

Docket No. 25068-17L, Kent Trembly v. C.I.R., Order available here.

This case was on the docket for Omaha, Nebraska, for April 20 before the Tax Court cancelled their dockets due to COVID-19.  The IRS had filed a motion for summary judgment, but the petitioner has not been responsive.

Giving the petitioner the benefit of the doubt, the Court presumes that he thought the cancelled trial setting meant he did not need to respond to the motion.  The Court gave him an extension in this order to May 1 to respond. 

Since then, petitioner’s counsel withdrew so things are not looking good.  The Court gave Mr. Trembly an extension until June 12 to file a response and ordered that he register by June 5 for electronic access.


William Schmidt About William Schmidt

William Schmidt joined Kansas Legal Services in 2016 to manage cases for the Kansas Low Income Taxpayer Clinic and became Clinic Director January 2017. Previously, he worked on pro bono tax cases for the 3 Kansas City metro area Low Income Taxpayer Clinics. He records and edits a tax podcast called Tax Justice Warriors and is now an adjunct professor for Washburn University School of Law.

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