Should the Tax Court Sua Sponte Continue a Case When Taxpayer Would Benefit from Representation

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I saw the headnote of Ford v. Commissioner, 122 AFTR 2d xxxx, No. 18-1524 (6th Cir. 2018) and decided it was a case about hobby loss. It is; however, fellow blogger Peter Reilly pointed out to me that in the Sixth Circuit, Ms. Ford also raised as a ground for overturning the opinion the failure of the Tax Court to sua sponte continue her case when it was called at the Nashville calendar call of the Tax Court. You can find Peter’s post on the case here.

The idea that the failure to grant a continuance that the taxpayer never requested could form the basis for a successful appeal seemed a bit far-fetched to me. I guess it did to the Sixth Circuit as well since it found against Ms. Ford on that issue. Despite the difficult stretch to get to where Ms. Ford wanted the Sixth Circuit to go, the facts of the case regarding the need for some help from the court are worth discussing as a lesson for future litigants.

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Ms. Ford ran a restaurant and venue for emerging music artists in Nashville. From reading the opinion, I came away with the impression that the business had helped to launch the careers of some artists who had performed there. I also came away with the impression that the business had not produced a profit for many years and only continued to exist because of Ms. Ford’s generosity. The IRS audited her return and disallowed losses generated by the business, arguing that Ms. Ford did not engage in the business for profit but rather was motivated by something other than profit. The IRS sent Ms. Ford a notice of deficiency and she petitioned the Tax Court.

At calendar call, she appeared with her return preparer who is an enrolled agent. Enrolled agents can study and take the Tax Court test to practice before the court. I have written about the test before. Many have passed the test but the vast majority have not taken the test because Tax Court representation is not something they want to do. Most of the enrolled agents I have encountered are very knowledgeable about taxes and very diligent in representing their clients. I regularly recommend that individuals seeking the services of our clinic who do not qualify for our services seek advice from an enrolled agent in their neighborhood because I think the test to become an enrolled agent and the ongoing training they pursue generally makes them a reasonably priced, well-trained option for the types of individuals who my clinic must turn away.

Because representing someone in Tax Court falls pretty far outside the scope of what most enrolled agents do for their clients, going to the Tax Court with the client as happened in Ms. Ford’s case puts the EA, the client and the court in an awkward position. The EA cannot speak to the court on behalf of the client unless the EA has passed the Tax Court’s admission test. The client is left having to speak to the court and often the EA is not in a position to provide much, if any, guidance on the procedural aspects of the case even though they may know the substantive aspects of the case very well. The court can speak to the EA and provide direction. Judge Foley did that in this case but ultimately the taxpayer must be the one to talk to the court and the one to decide what to do.

Ms. Ford did not know how to best present her case and the EA she brought with her either did not know how to do it through her or did not know how to do it either. As a result she did a poor job of presenting her case. It’s hard to say whether she might have won with a good lawyer guiding the introduction of evidence. It would be expensive for her to hire a good lawyer to represent her but maybe not as expensive as losing the case. The EA may have advised her to obtain a lawyer and may have suggested lawyers she could use. The case does not get into those facts.

The case does bring out another facet of the dynamic at calendar call, which is that at almost every Tax Court calendar call, there are tax lawyers there as volunteers willing to meet with unrepresented taxpayers and provide advice. If you want to read more about the calendar call program, here is an article about a successful representation of someone encountered at calendar call. In Ms. Ford’s case, she was fortunate to meet with an excellent tax lawyer, Mary Gillum, who runs the tax clinic at Legal Aid Society of Middle Tennessee & the Cumberlands. Mary has been running the tax clinic there for almost two decades and is a fierce litigator, but Mary is hamstrung in helping someone like Ms. Ford. First, she is hamstrung because she has only a short time to size up the situation. Second, she is hamstrung because Ms. Ford is over the income guidelines of IRC 7526, which makes it difficult for Mary to take on full representation of the case. Lastly, Mary may have been hamstrung by the existence of the EA. Although the court suggested that Ms. Ford speak with Mary who was there to volunteer and assist unrepresented taxpayers, a taxpayer who brings a representative, even one not qualified to represent someone in the Tax Court, can create a barrier to effective counseling. The dynamic here is not one that the court discusses because it would have no way of knowing what happened. The program of volunteers at Tax Court calendars has helped many people but does not appear to have helped Ms. Ford in this situation.

Ms. Ford hired an attorney to handle her appeal but by then it was too late. The attorney handling the appeal is stuck with the record below. He wrote a brief arguing that the Tax Court erred in not deciding on its own that Ms. Ford’s case should have been continued and arguing that she had proved the business purpose of the venture. With respect to the first argument, it is difficult to believe that the attorney had a realistic expectation of success at the appellate level. With respect to the second argument, he did not have enough to work with based on the record at trial. He copied into his brief portions of the trial transcript regarding the back and forth between the court and Ms. Ford at calendar call as part of his effort to show a continuance should have been granted. I copy those below so you can see the difficult spot Ms. Ford had placed herself in by not coming to court with someone authorized to represent her. This also puts the court in an awkward spot but if the Tax Court granted a continuance every time someone appeared before it who did not have their act together, it would be granting multiple continuances at every calendar.

THE COURT: An option from the Court is to push this later on in the week to give you a little more time to gather that information. We could proceed Wednesday. What’s your position about proceeding to trial on this matter? Or would you still like some time to see if you could settle this?

  1. FORD: I really am confused about all of this.

THE COURT: Okay. Okay.

  1. FORD: I’ve never been to court like this.

THE COURT Okay.

  1. FORD: So I’m trying to learn.

THE COURT: I don’t know if – you may not meet the guidelines for Ms. Gillam. I don’t know. But if you do, then – well, you’ve been working with your CPAso in consultation with him, I think we should decide what the most prudent way to proceed is, whether you should proceed to trial or whether you should try and work something out or if you think you have a good case and you’re ready to go to trial then we’ll have a trial in this matter on Wednesday, but that would give you a couple more days to gather more information and also any other documentation that you think would support your position. It’s the Government’s position that this case is – that Ms. Ford didn’t have the requisite intent to make a profit?

  1. HARRIS: That is correct, Your Honor.

THE COURT: And –

  1. HARRIS: Your Honor will remember, we issued discovery on this and attempted to gather documents to show that this is like manner – it was conducted, and the Court does have an order, a standing pretrial order. I’m happy to look at what they have but this has drug on for quite a while.

THE COURT: This case hasn’t been –

  1. HARRIS: No, it hasn’t. I’m sorry. No, it hasn’t but we have been seeking information since last fall.

THE COURT: And is there any reason why that information hasn’t been provided?

  1. FORD: Well, I was sick with pneumonia for a couple of months with pneumonia and bronchitis, and there was a storm that hit the Bell Cove, my place of business. …

THE COURT: Well, Ms. Ford, if we proceed to trial, one thing you have to be aware of is there are specific rules that you’re going to have to meet in order to make your case, and of course you can consult with your CPA. I’m sure your CPA is aware of what the rules under 183 are and what the standards are and exactly what Ms. Ford is going to have to establish in order to meet those rules. And it’s going to be your contention that she meets those standards; is that correct?

  1. KING: Yes.

THE COURT: Well, what I can do is schedule this trial for Wednesday at ten o’clock and that doesn’t mean that the parties can’t sit down and talk prior to Wednesday. I would anticipate that it might make some sense for you guys to talk and to see if something can be worked out. I don’t know what the merits are in this case. I don’t know what evidence you plan to present. Can you give me an idea about what kind of evidence you plan to present?

  1. KING: Well, I think she will be prepared to go through the rules to establish that she was in the business of making money.

THE COURT: Okay. All right. So any witnesses, Ms. Ford, that you plan to call?

  1. FORD: I don’t know. Right now I’m not sure what 183 is even.

THE COURT: Okay. Well consult with your CPA. He’ll know what the rules are and what’s going to be important for you is I’m going to give you the opportunity to testify and when you testify, you just make sur[e] that you hit all the important points. It also helps to have documentation, you know, business licenses and more things that support your contention that you were in this endeavor to make a profit.

  1. FORD: Well I wouldn’t have gone into it if I wasn’t.

THE COURT: Okay.

  1. FORD: That would be silly.

THE COURT: Okay.

  1. FORD: I mean, I’ve generated millions of dollars through the music industry from helping everybody there. There are so many, George Jones, *13John Anderson – I can’t tell you how much people I’ve helped through there. And I didn’t go in there to fail, you know. I would not want to fail.

THE COURT: All right. Well, this is what we’ll do. We will schedule the trial for ten o’clock Wednesday. And do we have a stipulation of facts?

  1. HARRIS: Well, Your Honor, I have one prepared. It is not signed and if I could get some clarification on exactly, is Mr. King a witness? Is he – what role he’s going to play. Ms. Ford didn’t file a ––– I’m somewhat at a loss here.

THE COURT: Okay. Mr. King?

  1. KING: I can only be a witness.

THE COURT: Okay.

  1. KING: I cannot practice.1

THE COURT: So you’ll be a witness. Of course, you can — I’m going to anticipate that you’ll be working with Ms. Ford so that she has a better understanding of what the rules are, and I would also suggest that you meet with Ms. Gillam. Ms. Gillam is right behind you in the first row and talk to her, and then I think she’ll be able to give you a better — you, the two of you, go in one of the counsel’s rooms, talk with Ms. Gillam, so that you can get a better assessment of the strength of your case and just how prudent it is for you to proceed.

[Calendar Transcript, pgs. 6-12 (emphasis added)]

Conclusion

For most people going to Tax Court, proving their case without a qualified representative will be very difficult. In deciding whether to hire someone, the taxpayer has to take into account the amount at issue and the ongoing nature of the matter in dispute. Assuming that Ms. Ford wanted to continue to run the business, she might have found the calculus for hiring a qualified representative in her situation would have led her to hire someone. Because of the complexity of proving a hobby loss case and the potential for the issue to continue on in future years, someone in Ms. Ford’s situation should think hard before proceeding in the Tax Court without qualified representation. Similarly, someone in the position of this EA must also try to steer their client to a qualified representative even if they have a good grasp of the substance of the case.

 

 

Comments

  1. Excellent post Keith, thanks for sharing. Ms. Ford’s case may have achieved a more favorable outcome with better pre-trial case preparation and representation before Tax Court.

    Now is the time for CPAs and EAs desiring to represent tax controversy cases before Tax Court prepare for taking the upcoming November 2020 U.S. Tax Court Non-Attorney Written Exam to show they have the obtained the requisite knowledge to provide competent representation before the Court including pre-petition tax law advisement, knowledge of case management, the Tax Court Rules of Practice and Procedure, preparing cases for trial, motions filings , discovery procedures, properly introducing evidence in compliance with the Federal Rules of Evidence, ethics compliance with the ABA MRPC, and knowledge of post-trial procedures that are all imperative to representation of a tax controversy case before the Court.

    Tax Court Exam Study programs are available that prepare CPAs and EAs to take the U.S. Tax Court Non-Attorney Written Examination through online classes or self study options.
    2019 is the year to learn and prepare to take the 2020 exam.

    It’s a challenging exam, but with proper studies a CPA or EA can gain the necessary knowledge to competently represent taxpayer’s before Tax Court in both Small or Regular Tax Cases.

    Interested CPAs or EAs can explore options
    https://taxcourtexamclasses.com/

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