Putting IRS Records at Issue: Proving Supervisory Approval and Receipt of Notice of Deficiency. Designated Orders 9/10/28 – 9/14/18

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We welcome designated order blogger Caleb Smith from the University of Minnesota with this week’s discussion of the orders the Tax Court has deemed important. Keith

Taxpayers routinely get into problems when they don’t keep good records. At least in part because of the information imbalance between the IRS and taxpayer, when the IRS reviews a return and says “prove it” the burden is (generally) on the taxpayer to do so. Attempts by the taxpayer to turn the tables on the IRS (“prove you, the IRS, have good reason to challenge my credit, etc.”) are unlikely to succeed.

However, there are areas where demanding the IRS “prove it” can be a winning argument. Not unsurprisingly, these are areas where the information imbalance tips to the IRS -in other words, procedural areas where the IRS would have better knowledge of whether they met their obligations than the taxpayer would. We will dive into two designated orders that deal with these common areas: (1) proving supervisory approval under IRC § 6751, and (2) proving mailing in Collection Due Process (CDP) cases. Because it gives a better glimpse into the horrors of IRS recordkeeping, we’ll start with the CDP case.


Summary Judgment Haunts the IRS Once More: Johnson & Roberson v. C.I.R., Dkt. # 22224-17L (order here)

Judge Gustafson has tried on numerous occasions to explain what is required for a motion for summary judgment to succeed. Those lessons generally involved motions that failed to fully address relevant legal questions or put forth necessary facts through affidavits, exhibits, and the like.

The IRS motion for summary judgment in this case goes, perhaps, one step further: claiming that facts aren’t “subject to genuine dispute” and, as evidence, attaching documents that seem to prove only that the facts ARE subject to genuine dispute. More on the nature of those documents (and what they say about IRS recordkeeping) in a second. But first, for those keeping score at home, this order also provides a new addition to the list of “signs the judge is not going to rule in your favor”: when the judge finds it necessary to remind a party that they are “responsible for what is asserted in a motion that he signs and files.”

Law students are taught about the potential horrors and responsibilities of FRCP Rule 11. The idea is to imprint upon their mind the responsibilities in making representations to the court, such that Rule 11 will not become something they will need to be reminded of later in practice. A Tax Court judge referencing Rule 33(b) in response to your motion is fairly close to a reminder of that 1L Civil Procedures lecture, and may on its own trigger some unwanted flashbacks.

So what went so horribly wrong in this motion for summary judgment that the IRS needed to be reminded of the “effect of their signature” on that motion? To understand that, we need to first understand what is at issue.

The pro se petitioners in this case wanted to argue their underlying tax liability in the CDP hearing, but were denied the opportunity to do so by Appeals. For present purposes, if the petitioners could show they “did not receive any statutory notice of deficiency (SNOD)” then they can raise the underlying tax as an issue in the CDP hearing. See IRC § 6330(c)(2)(B). Also for present purposes, receiving a SNOD means actual receipt, not just that it was mailed to the last known address.

When a petitioner puts actual receipt of an SNOD at issue in a CDP hearing, the typical song-and-dance is for the IRS to offer evidence that the SNOD was properly mailed to the actual residence of the taxpayer at the time. Since there is a presumption that the USPS does its job (that is, properly delivers the mail), it is usually an uphill battle for the taxpayer to argue “yes, I lived there, but no, I never got that piece of mail” -especially since SNODs are sent certified and refusing to accept the mail is just as good as receiving it. See Sego v. C.I.R., 114 T.C. 604 (2000).

So for this summary judgment motion the IRS basically needs to put out evidence showing that the SNOD was mailed and received by the petitioners, and that the fact of receipt is not subject to genuine dispute. The evidence the IRS puts forth on that point is, shall we say, lacking.

Judge Gustafson immediately finds some issues with the IRS records that, while not proving a lack of mailing, “does not inspire confidence.” First is a dating issue: the SNOD is dated 3/28/2016, but the mailing record only shows a letter (not necessarily the SNOD) going out 3/24/2016 (that is, four days earlier than the SNOD is dated). I don’t put much faith in the dates printed on IRS letters, so this is not particularly surprising to me, but the inconsistency does throw a little doubt on the credibility of the IRS records. Further, Judge Gustafson notes that there is no “certified mail green card bearing a signature of either petitioner” that the IRS can point to.

It seems pretty obvious from the outset that the actual receipt of the SNOD is a fact “subject to genuine dispute.” First, the taxpayers request for a CDP hearing (Form 12153) appears to reflect ignorance of any SNOD being sent. But far, far, more damning are the IRS Appeals CDP records on that point. The “Case Activity Record” speaks for itself:

Dated March 30, 2017: “Tracked certified mail number and found that as of April 16, 2016, the status of the SNOD is still in transit for both taxpayers, therefore, it is determine[d] that the taxpayers did not receive the SNOD.”

There you have it. IRS Appeals has found that there was no receipt of SNOD. The taxpayer is also arguing there was no receipt of SNOD. IRS Counsel is arguing that “petitioners had a prior opportunity to dispute their underlying liability pursuant to the notice of deficiency” and therefore are precluded from raising it in the CDP hearing. With utmost charity, the IRS argument could potentially be saved if it was arguing that there was another opportunity to argue the tax (which, of course, would require other facts). But that is not what is happening.

The IRS motion explicitly asserts (as a fact) receipt of the SNOD by petitioners on March 28. 2016. As evidence of that fact, the IRS attaches “Exhibit 1” and “Rubilotta Declaration, Exhibit D.”

Unfortunately, “Exhibit 1” is just the mailing list (which simply shows a letter being sent four days before the SNOD date, and says nothing about receipt), while “Exhibit D” is apparently just the SNOD itself. Basically, the IRS is trying to get summary judgment against pro se taxpayers based on evidence that, at best, shows that the only thing certain in the matter is that there is a big, genuine issue of material fact. Judge Gustafson is not impressed, finds against the IRS on every point, casually mentions Counsel’s responsibilities vis a vis Rule 33(b), and appears on the verge of remanding to Appeals.

One may read this order as a FRCP Rule 11/Tax Court Rule 33(b) lesson, and the importance of due diligence before the court. It definitely provides a lot to think about on those points. But I would note that IRS Counsel’s follies in this case did not go unassisted. Specifically, IRS Appeals did not do their job. Although the settlement officer (SO) specifically found that the SNOD was not received by the taxpayers, the SO also determined “the taxpayer is precluded from raising the tax liability due to prior opportunity” to argue the tax. That is arguably what led to the taxpayer bringing this petition in the first place. Without SNOD receipt this outcome could conceivably be correct, but it would take more explanation from the SO as to what the prior opportunity was. Instead, the poor record-keeping and poor file review was preserved from Appeals to Counsel, culminating in the rather embarrassing order being issued.

Chai/Graev Ghouls and Recordkeeping: Tribune Media Company v. C.I.R., Dkt. # 20940-16 (order here)

Analysis of the IRS burden of proof in penalty cases, and specifically in proving compliance with IRC § 6751 need not be rehashed here (but can be reviewed here among many other places, for those that need a refresher).  Tribune Media Company doesn’t break any new ground on the issue, but it does provide some practical lessons for both the IRS and private practitioners in litigating IRC § 6751 issues.

The first lesson is one that I suspect the IRS already is in the process of correcting, post-Graev. That lesson is on the value of standardizing penalty approval procedures. The IRS loves standardized forms. This isn’t an arbitrary love: the constraints of the IRS budget and the sheer volume of work that goes into administering the IRC pretty much requires a heavy reliance on standardized forms.

The IRS already has standardized forms that it can and does use for penalty approval, but the Service was likely far more lax in tracking (or actually using) those forms pre-Graev. And although Graev/IRC § 6751 does not require a specific “form” as proof of supervisory approval (it simply must be written approval), things can get needlessly complicated if you draw outside the lines. Tribune Media Company demonstrates this well.

As a (presumably) complicated partnership case, there were numerous IRS employees assigned to Tribune Media Company at the audit stage. At the outset there was both a revenue agent and an attorney from local IRS counsel assigned to assist the revenue agent. Both of these parties, apparently, came to the determination that a penalty should be applied, and both received oral approval from their separate immediate supervisors before issuing the notice of proposed adjustment.

Of course, oral approval of the penalty is not enough. So the IRS has to provide something more… What would usually, or hopefully, be a readily available and standardized penalty approval form. Only that form does not appear to exist in this case. The IRS tries to comply with Tribune Media Company requests for documents showing supervisory approval largely through memoranda of the supervisor, email chains and handwritten notes (pertaining to the penalties, one assumes). But these “irregular approvals” aren’t good enough for Tribune Media Company… so formal discovery requests ensue.

Which leads to the second lesson: don’t expect success when you ask the Court to “look behind” IRS documents.

Judge Buch’s order does a good job of detailing the standards of discovery in tax court litigation. Generally, the scope of discoverable information in Tax Court Rule 70(b) is not significantly different from the Rules of Federal Civil Procedure. However, because the Tax Court will not examine “the propriety of the Commissioner’s administrative policy or procedure underlying his penalty determinations” (see Raifman v. C.I.R., T.C. Memo. 2018-101), any discovery requests that could only be used to “look behind” the IRS determination will be shot down.

So when Tribune Media Company requests documents (1) “related to the Commissioner’s consideration, determination, or approval of penalties” and (2) “all forms, checklists, or other documents” the IRS generally uses for memorializing penalty approval they are going a step too far. The IRS has to provide proof of written supervisory approval for the penalties. Full stop. They do not have to provide any detail on the reasoning that went into the penalties, or (arguably) what the typical approval documents would be in this sort of case. (I wonder about this latter issue, as it seems to me it could properly be used by Tribune Media Company for impeachment purposes).

In the end, there appears to me some irony to the Tribune Media Company case. It seems highly likely that there was supervisory penalty approval, or at least a reasoned process leading to the penalty determination. The IRS is better off from a litigating perspective, however, streamlining penalty determination with rubber stamp (or worse, “automated”) approval on standardized forms.

I understand the Congressional desire to keep the IRS from using penalties as “bargaining chips,” but am not convinced that “written supervisory approval” really does much to advance that goal. What I am more worried about, especially in working with low-income taxpayers, is when accuracy penalties are more-or-less arbitrarily tacked on to liabilities in ways that do nothing to help compliance. In those cases, at least with the proper training, I think that supervisory approval could actually result in reducing the number of ill-advised penalties -they aren’t really being proposed as “bargaining chips” in the first place. Instead you have what increasingly looks like a bad-actor loophole -one which may, depending on how things develop with IRC § 6751(b)(2)(B) as applied to AUR, not even be available for the most vulnerable and least culpable taxpayers.

Odds and Ends: Other Designated Orders.

Two other designated orders were issued which will not be discussed. One fits the usual narrative of taxpayers losing in CDP when they do not participate in the CDP hearing, or do much of anything other than file a timely tax court petition (found here). The other provides a quick-and-dirty primer on IRC 351 transfers, and easily disposes the matter in favor of the IRS (found here).



Caleb Smith About Caleb Smith

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


  1. Norman Diamond says

    ‘The pro se petitioners in this case wanted to argue their underlying tax liability in the CDP hearing, but were denied the opportunity to do so by Appeals.’

    That’s not unusual. What is unusual is that the court cared.

    ‘For present purposes, if the petitioners could show they “did not receive any statutory notice of deficiency (SNOD)” then they can raise the underlying tax as an issue in the CDP hearing.’

    One way of showing it might be that the IRS said it didn’t mail one. But what happens if the IRS both says that it mailed one and that it didn’t mail one (and the petitioner didn’t get one).

    ‘Since there is a presumption that the USPS does its job (that is, properly delivers the mail),’

    If anyone needs to disprove that, I have four reports, i.e. four pieces of registered mail, where USPS reported to Japan Post that registered letters entered USPS and then disappeared. Three were simply disappearances. One case had a pair of USPS web site reports, one saying a registered letter was delivered to the IRS and the other a few days later saying the letter was back in USPS again before disappearing, but USPS simply reported to Japan Post that the letter disappeared.

    I also have one report where a server residing in the US sent US domestic certified mail and received a return receipt signed by a court employees, but the judge ruled that the court didn’t receive it. I also have one report where USPS said a registered letter was delivered to the IRS but the IRS said it wasn’t.

    Meanwhile, to comply with Cook v. Tait, one would think the IRS would have to use a reliable method of delivery even when the destination country isn’t Japan. For example the IRS letter to Mr. Atuke was reasonably calculated to take longer than thirty days for delivery and it did take longer. In some other countries, theft from registered mail is even more common than in the US.

    ‘Further, Judge Gustafson notes that there is no “certified mail green card bearing a signature of either petitioner” that the IRS can point to.’

    Some people blame USPS for that, but I wonder. The failures to return A.R. cards (return receipts for registered mail) from the IRS are far more numerous than failures to return A.R. cards from other destinations. In cases where USPS actually delivered registered letters to the IRS, in response to my requests for investigations USPS sends Japan Post a fax of the recipient’s signature or illegible scrawl or something. In a case where a server resided in the US and used domestic certified mail, USPS printed a report from the USPS’s intranet but I don’t think it included a copy of the recipient’s signature. In a case where the IRS sent me registered mail with an A.R. card, I used a pen with purple ink to fill in half of the stuff that the IRS was supposed to fill in before mailing; I used a purple pen so my writing would be distinguishable from theirs (in addition to signing and hand-printing my name and the delivery date as I’m supposed to do).

    By the way, a few years ago, USPS’s web server used to retrieve archived records when necessary, so it didn’t matter how old the item was that was being searched. Unfortunately I didn’t guess that was going to change. If you need to prove delivery, you’d better print out the report from USPS’s web server before it’s too late.

  2. Meanwhile, there is this development in the Johnson/Roberson case. In a September 27, 2018 order Judge Gustafson wrote:

    On September 10, 2018, we issued in this “collection due process” (“CDP”) case an order (Doc. 17) that denied the Commissioner’s motion for summary judgment (Doc. 6), that granted petitioners’ motion (Doc. 9) for leave to amend their petition, and that ordered both parties to show cause why this case should not be remanded to IRS Appeals for a supplemental hearing. The Commissioner stated (see Doc. 19) that he has “no objection to this case being remanded to Appeals for a supplemental hearing”; but petitioners objected (see Doc. 23) and argued, among other things, that a remand “would place petitioners back into a setting where we have absolutely no equitable standing nor an independent oversight forum from which to challenge and defend”. We will discharge our order to show cause and will not remand the case but will proceed to trial at the Court’s Boston session beginning October 15, 2018.

    On September 27, 2018, the Court held a telephone conference with the Commissioner’s counsel and petitioner Lauri Denise Johnson (who stated that she had authority to speak for both petitioners). The Court observed that, where IRS Appeals has abused its discretion in the CDP process, the Commissioner does not have a right to a remand. But the Court explained for Ms. Johnson’s benefit: that many petitioners benefit from a remand (since, for example, it gives them another opportunity to seeks remedies from Appeals at a supplemental hearing); that the remand does not deprive the taxpayer of ultimate judicial review of Appeals’ supplemental determination; and that if there is no remand and the Court simply decides that Appeals’ determination cannot be sustained, that decision, without more, does not bar the IRS from future collection activity, for which activity section 6330(b)(2) (“One Hearing Per Period”) may preclude judicial review. Ms. Johnson nonetheless stated that petitioners do not want a remand and will be ready to proceed to trial.


    (Was this a designated order? Unfortunately, there is no way to go back the next day, or next week, to check which were designated.)

    It was about 36 years ago, but I have some memories about traveling to Chicago for a seminar on Tax Court practice. This was shortly after I had finished law school and passed the bar exam; I remember some of that, too. This seminar had a large audience, and speakers with national reputations. One of them said, in a comment that has stayed with me all these years, that motions for summary judgment are rarely seen in Tax Court practice.

    I wondered why, back then, and by now it is apparent that an MSJ is appropriate in many cases, including some that would not have been found on a 1980’s docket. I think efficiency has become more important, for both Chief Counsel and the Tax Court. But as Judge Gustafson’s order shows, extremism in the pursuit of efficiency is sometimes a vice.

    I like to look beyond the orders to find, for example, which Chief Counsel office has egg on its face. This case came from Boston. For those looking for irony, the current IRS Chief Counsel attorney of record worked more than two years (2006-2008) in Washington, D.C., for the IRS Office of Professional Responsibility.

  3. Norman Diamond says

    “if there is no remand and the Court simply decides that Appeals’ determination cannot be sustained, that decision, without more, does not bar the IRS from future collection activity, for which activity section 6330(b)(2) (“One Hearing Per Period”) may preclude judicial review”

    That sounds like a denial of due process on future collection activity, which should be relevant if the 5th amendment gets reinstated. Meanwhile, suppose petitioners move for Tax Court to retain jurisdiction in the current case?

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