Questions of Fact, Questions of Law, and How and When to Argue Them: Designated Orders, November 5 – 9, 2018

Caleb Smith of the University of Minnesota brings us this week’s designated order blog post. The Nordberg case Professor Smith discuses was tried at the most recent Boston calendar where my students were watching the case with me.  I told them that as a retired federal employee, I was 100% behind Mr. Nordberg and as a tax professor I was 100% sure he would lose.  I do not often have that degree of certainty. Keith

Is It Enough That The Parties Agree There Is No Issue of Material Fact? Gage v. C.I.R., Dkt. # 23874-17 (here)

There have been no shortage of orders denying summary judgment to the IRS covered at PT (Judge Gustafson, as covered here, has been one of the leading proponents). What makes the order in Gage slightly different is that both parties move for summary judgment, and neither receive it.

As a matter of policy, the purpose of summary judgment is fairly straightforward: to preserve judicial resources and avoid needless trials when there really isn’t anything else needed for the Court to render a decision. Even so, as demonstrated in Gage, parties can’t simply agree to the applicability of summary judgment as a “shortcut” to an early decision.

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Gage involves what appears to be a simple (or at least narrow) legal question: whether a particular $875,000 payment to the US government is deductible as a business expense. The payment arose from a lawsuit brought against the petitioner’s business by the U.S. government under the National Housing Act. The record in Gage appears to be fairly developed at the time of the summary judgment motions, and much, if not all, of the case appears to hinge on the nature of the resulting settlement payment. In a nutshell, if the payment at issue was a “fine or similar penalty” to the government then the payment is not deductible and the petitioner loses. See IRC 162(f) and Treas. Reg. 1.162-21. The case, therefore, is almost entirely an issue of the characterization of the payment.

In dismissing both motions for summary judgment, Judge Panuthos lists three large issues of “material fact” that he believes continue to be genuinely in dispute: “(1) the characterization and purpose of the $875,000 settlement payment made by petitioners to the government; (2) whether that $875,000 payment represented compensation to the government or double damages; and (3) if that $875,000 payment represents double damages, whether the parties to the settlement agreement intended the payment to compensate the government for its losses or to deter and punish defendants for their conduct.”

I’m not positive, however, that I agree with Judge Panuthos in describing these three outstanding issues as ones of “material fact.” The problem with characterization cases like this is the blurring/blending of issues of “fact” and issues of “law.” Is the first point Judge Panuthos lists (the “characterization and purpose of the $875,000 settlement payment”) really an issue of “material fact” or a matter of law? I would say the petitioner is arguing that the (undisputed) facts in the record necessarily lead to the characterization of the payment as compensatory damages. If the fact that the payment was compensatory damage is found, the law should apply in their favor. Full stop. Conversely, the IRS is arguing that those same (undisputed) facts necessarily lead to the characterization of the payment as a fine or penalty. If that fact is found the law should apply in their favor. Full stop. In other words, the parties are agreeing on the “facts” (the background of the settlement) but disagreeing on how they should be interpreted as “ultimate facts” leading necessarily to the legal outcome. One may wonder if a dispute on the “ultimate facts” isn’t the same as a dispute on the law as applied to the facts. If that were the case, this could be a good candidate for summary judgment: the Court would simply fulfill its role as arbiter of determining the side that was “entitled to a judgment as a matter of law.”

And yet, both summary judgment motions are denied. Why might this be?

In the end, I think the parties are arguing that there are enough undisputed facts in the record for the Court to reach a judgment as a matter of law and Special Trial Judge Panuthos is just saying, “No: the Court needs more.” It isn’t necessarily that there remains a disputed issue of material fact, but just that there aren’t enough facts in the record for either side to prevail. All Judge Panuthos has is the background facts of the transaction -but the characterization issue requires a lot more before anyone is “entitled to judgement as a matter of law.” I’d note that this is the case even though the burden is on the petitioner to show that they are entitled to the deduction. (See INDOPCO, Inc. v. C.I.R., 503 U.S. 79 (1992).) It would be a different case if it were being submitted fully stipulated under T.C. Rule 122 rather than summary judgment under T.C. Rule 121. The IRS can’t say “the petitioner hasn’t met their burden, so we are entitled to judgment” at the earlier stage, since the petitioner still could put evidence into the record. In that respect, even though this order denies the IRS summary judgment, I’d read this as a warning to petitioner: you probably won’t win unless you put a little more into the record.

All of which may all be my long-winded way of saying that blended issues of law and fact are generally bad candidates for summary judgment.

Another Characterization Issue: Is Your Underperforming Pension Really a Roth IRA? Nordberg v. C.I.R., Dkt. No. 1426-17 (here)

Procedurally, there isn’t much of interest to this order -a bench decision finding against the taxpayer on a novel legal argument. Further, there wasn’t really much suspense to the decision: the novel argument put forth by the taxpayer (that his government pension should be taxed the same as a Roth IRA) was pretty quickly dismissed by Judge Gustafson.

However, the case does provide one more addition to the list of judicial phrases that signal you’re going to lose, or at least going to lose in Tax Court. To wit: “The principle flaw in [the petitioner’s] argument is that there is no basis for it in the Code.” That is a pretty big flaw when arguing in Tax Court. And in that way Nordberg serves as a somewhat useful teaching tool: a reminder that the Tax Court is not a court of equity, and not all arguments are created equally.

Although doomed to fail, it is possible the pro-se petitioner had a greater legal background (or at least believed he did) than most: Mr. Nordberg was an employee of a member of the US House of Representatives for almost 20 years. But a little knowledge can be a dangerous thing, and the style of argument put forth by Mr. Nordberg demonstrates that.

Mr. Nordberg’s primary argument is based on “general principles” of the Code, rather than focusing on the specific Code sections at issue. With regards to retirement income, Mr. Nordberg has derived the following general principle from the Code: if your contributions to the retirement plan are deductible, you have an IRA with the interest and principal taxable on receipt. If your contributions to the retirement plan are non-deductible, you have a Roth IRA with neither the interest or the principal taxable on receipt.

Mr. Nordberg made non-deductible contributions to his pension so, he reasons, all of his pension should be taxed like a Roth IRA. To repeat Judge Gustafson, the problem with this argument is that it has no basis for it in the Code. A second problem, however, is that it also only looks at half of the contributions to the pension (conveniently, the non-deductible portion).

Mr. Nordberg had a government pension through the Civil Service Retirement System (CSRS). The terms of the pension were that Mr. Nordberg made mandatory after-tax contributions (somewhat similarly to a Roth IRA). However, the employer also matched these payments (which were effectively “pre-tax” to Mr. Nordberg). The Code and the court in Malbon v. U.S., 43 F.3d 466 (9th Cir. 1994), treat annuity payments from these arrangements as partially taxable and partially non-taxable. The non-taxable portion being only that amount which represents the post-tax contributions by the taxpayer (with that amount determined pro-rata based on life-expectancy tables). Everything that isn’t the taxpayer’s contribution (including interest) is taxable. As Judge Gustafson puts it, Malbon “resolves the issues in this case: Mr. Nordberg’s CSRS annuity payments are not excluded from taxable income. Only a portion of them are non-taxable.” In other words, the Code and case law conclusively determines that an annuity payment is taxed unlike either a Roth IRA or regular IRA. There is no “general principle” of tax law that will save you when Congress and the Courts have spoken otherwise.

Similarly, and as a closing point, arguing about general notions of fairness is unlikely to get you very far in Tax Court. One of the main concerns of Mr. Nordberg appeared to be both that his government pensions rate of return was less than a private Roth IRA may have been, and that he perceived the tax consequences to be worse. Without a hint of irony speaking to a long-time employee of a US House Representative, Judge Gustafson notes that the Court doesn’t have the “authority to depart from the law Congress has enacted and to instead devise rules of taxation based on felt fairness.” In other words, if you want fairness take it up with your former boss.

Odds and Ends: Failing to Show Up

The remaining four designated orders concerned taxpayers that failed to show up, literally or figuratively, for their case. On the literal side, you have Nuss v. C.I.R., Dkt. No. 22655-17S (here): a bench opinion by Judge Carluzzo against a petitioner that didn’t show up for his own trial. Similarly, Judge Gustafson dismissed the petitioners case in Hochschild v. C.I.R. (here) for failure to properly prosecute when the taxpayer failed to show up to trial or otherwise respond to numerous inquiries about her case. Moving to the more figurative side of failing to show up, you have McHenry Jr. v. C.I.R. (here) granting the IRS summary judgment in a CDP case where the petitioner didn’t provide IRS appeals any financial information, but insisted they should be placed in Currently Not Collectible status.

Lastly, and decidedly on the figurative side of the failing-to-show-up spectrum, you have Tunsill v. C.I.R. (here), which involves the increasingly popular motion of dismissing for failure to state a claim on which relief can be granted. The petitioner, perhaps dazzled by the claims of hobbyist tax “lawyers” found online, goes out of their way to make clear that they are not, in any real way, showing up for their tax court case. Generally when a taxpayer feels the need to state, in their petition, that they are “making a special appearance before the court” (perhaps intending to demonstrate that they are not consenting to jurisdiction by sending a petition?) it actually means they aren’t really showing up at all. This case does not appear to be an exception, and Judge Leyden grants the dismissal.

The petition reads slightly unlike most tax protestor arguments, but maintains that same critical misunderstanding of what a Notice of Deficiency (and indeed, tax assessment) entails. The taxpayer’s words in their petition illustrates the confusion better than I could hope to: “In conclusion, [the taxpayer] is being accused of a commercial crime (offense against revenue laws). Pursuant to law, the person making the claim must register their claim to make a proper assessment, so that there can be a demand for performance. Without a demand for performance, there can be no neglect. Without neglect, there can be no crime. Without a crime, there can be no court proceeding.”

Tax law and tax procedure is confusing, even for those that work in the field. That the petitioner in this case referenced things like a phantom Form 1099 OID, the UCC and the 4th and 5th Amendments leads me to believe that he may have been the victim of some dubious online research. I commend the Tax Court for reaching out to the taxpayer and IRS with a conference call before moving forward with the dismissal. Psychologically it is much easier to believe things that benefit you: like the tax protestor that recently assured me that he does not need to file or pay taxes because of the “privacy act.” I only hope Mr. Tunsill’s dismissed case will be the wake-up call to seek qualified professional advice rather than a signal to him that the Court systems are a part of the IRS conspiracy.

 

 

 

 

 

 

 

 

Can A Lawyer’s Representation Be So Bad That It Is A Fraud on the Court? Designated Orders, October 8 – 12

Caleb Smith at the University of Minnesota brings us this week’s designated orders. Caleb highlights one case involving a lawyer whose removal from the Tax Court bar we have previously discussed. As he notes, the lawyer was a problem but competent return preparation could have perhaps avoided the whole problem. The more cases I see the more I am convinced that getting the return right is the key to having the tax system work properly and smoothly. To the extent that we can provide the resources and direction to assist people in filing a correct return, everyone will reap rewards from the creation of competent preparation. Keith 

“My Lawyer’s A Fraud!” Brown v. C.I.R., Dkt. # 28934-10 (here)

Much of the general public is probably aware of the right to effective counsel. As with many legal issues, popular understanding is cultivated by crime shows like Making a Murderer. Of course, in the very civil world of Tax Court no such right exists. And yet, apart from firing the attorney, might not the petitioner have some recourse for counsel that is so inept as to ruin their case?

This, at least, is the premise that the petitioners in Brown v. C.I.R. would like Judge Halpern to entertain. Their legal theory being that the representation was so bad as to be a fraud on the court, such that the prior decision should be vacated. Indeed, their attorney (Mr. Aka) was so inept that he was disbarred from the Tax Court in a case that was previously covered in Procedurally Taxing here.

But is doing your job poorly the same (or similar enough) as perpetrating a fraud on the court?

To that question, Judge Halpern provides a resounding “no.” And for good reason.

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The petitioners in this case appear to be grasping at straws. To be sure, Mr. Aka’s representation seems at best to be ineffective. A glance at the docket shows the situation getting off to a rocky start at an early date with missed deadlines and a frequent failure to respond. Apparently, after trial Judge Halpern even took the extra step of encouraging the petitioner to “supplement [their counsel] with someone with the skills perhaps to reach a settlement” with the IRS. But petitioner took no such action, and his faith in his counsel went unrewarded: shortly thereafter, Mr. Aka missed the deadline to file an opening brief. Instead, one month after the deadline, Mr. Aka filed a motion to extend the time to file an opening brief… and then, before the Tax Court had ruled on the motion, filed this opening brief… after the deadline he had requested. Judge Halpern was unswayed by this attempt, and struck the opening brief as untimely, while taking the extra step of ensuring that petitioner was personally delivered his order striking it. This step was taken so that petitioners could be made all-the-more aware of their attorney’s poor behavior.

When the Judge is implicitly and explicitly telling you your attorney is no good, that is probably because the attorney behaving egregiously bad. And yet, I opened the prior paragraph insisting that the petitioners were grasping in this case by arguing for vacating the decision on grounds of fraud. And that remains so for at least two reasons: (1) the legal standard for fraud on the court doesn’t sync up with the petitioner’s allegations, and (2) petitioners themselves don’t seem particularly sympathetic.

Beginning with the law, what do the petitioners need to show in this case? Quite a bit, actually. Judge Halpern provides various iterations of what fraud on the court is, mostly quoting Abatti v. Commissioner, 859 F.2d 115 (9th Cir. 1988). But really it boils down to proving, through clear and convincing evidence, that there was an intentional plan of deception to improperly influence the Court in its decision, and that the deception actually worked.

It isn’t immediately clear what the petitioner’s think their lawyer’s intentional plan of deception (henceforth, “scheme”) was, and much less clear to see how it “worked” (that is, resulted in the desired outcome by improperly influencing the Court). Petitioner’s offer that the scheme of the attorney was just to cover up his own incompetence.

Maybe.

But did that influence the Court in its decision? If it did, it must not have been in the way intended: the petitioner’s pretty much lost on all issues and Mr. Aka was subsequently disbarred. There is little doubt that Mr. Aka lied (in his excuses about missing deadlines). But to the extent that these lies constitute a scheme, they certainly didn’t work: that is, they did not influence the Court’s decision.

And that is the crux of the issue, and consequently where petitioners begin to appear less sympathetic than they otherwise would. For one, as has already been noted, the Court gave repeated notice to the petitioners that their counsel was inept throughout the proceedings. Petitioners simply decided not to act on those warnings. Only now that everything has (irreversibly) fallen apart, they appear to bring up some novel and serious allegations: namely, that Mr. Aka (1) didn’t offer evidence at trial that would have won the case, and (2) stipulated to facts that petitioners would never have agreed to.

Pretty serious allegations of professional misconduct, if not actually fraud. The only problem is that (1) the petitioners can’t actually point to what this unoffered evidence was, and (2) petitioner signed the stipulation of facts. The stipulated issues were, moreover, read at trial while the petitioner was there, who voiced no objection. These sorts of arguments resemble more and more a taxpayer that is grasping for a lifeline.

Which leads to the final point in this sad saga. It is pretty clear from reading over the actual decision in the case (here) that petitioners would have benefitted tremendously from competent counsel AND competent tax preparation. On the facts as presented in the decision, they almost certainly owe substantial additional tax, but (through their own mistakes), it is difficult to know how much. The returns are a morass of improper Schedule C deductions, impossible-to-align corporate tax returns, and poorly documented management fees. The extraordinarily poorly prepared returns (it is unclear if they were self-prepared) set the stage for the tangled mess that gets to Judge Halpern’s door. A competent tax return preparer could have likely nipped this in the bud (albeit with a tax bill the petitioners would have to contend with), thus saving years of time and resources (of the judiciary, the IRS and the petitioners themselves). For the petitioners in this case it is not clear why they did not avail themselves of competent tax preparation (or counsel): they certainly have the money. It is important to recognize that is not always the case…

When You Can’t Afford Tax Preparation: Hermit v. C.I.R., Dkt. # 15998-17SL (here)

Before becoming a lawyer, I worked at a non-profit that primarily focused on preparing tax returns for low-income taxpayers. The organization was originally founded by accountants in the late 1970s, with the refreshingly non-partisan idea that the ability of people to comply with their tax obligations should not depend on their ability to pay competent professionals. Over time and largely in step with the expansion of the Earned Income Tax Credit, organizations like this expanded nationwide and often took on more of a “financial empowerment” mission. Today, this network generally falls under the umbrella of “VITA” (Volunteer Income Tax Assistance), which must follow certain guidelines to receive blessing from the IRS. But the guidelines on who VITA organizations can serve, particularly with regards to self-employed taxpayers, leave many low-income taxpayers out in the cold. The National Taxpayer Advocate has previously listed this as a “most serious problem” in her annual report to Congress For these taxpayers, their options are (1) hire someone at a rate they can’t afford to prepare their taxes (especially true since these returns implicate Schedule C, which many preparers charge extra for), or (2) try filing on your own, which for many people is akin to being told “try reading Mandarin on your own.”

In Hermit, you have a petitioner that (potentially) falls in this trap. Mr. Hermit did not file a return for 2012, so the IRS did him the favor and sent a SFR based on “nonemployee compensation” (i.e. a 1099-Misc that the IRS had). Mr. Hermit responded to the SFR by requesting that the IRS send him the documents needed to prepare a return on his own since (1) he could not afford a preparer, and (2) he was “alarmed” by the tax on the SFR -which is understandable since it would be treated as 100% profit from self-employment, and wholly subject to SE tax.

Unfortunately, requesting the needed forms is about as far as Mr. Hermit goes in resolving this matter. He does not file any returns, and instead signs and mails a Notice of Deficiency Waiver (Form 5564), along with a request to enter an Installment Agreement at $200/month.

Mr. Hermit, at this point, seems fairly sympathetic taxpayer that is trying to comply. And maybe that accurately summarizes his intentions (I won’t play armchair psychologist any further). But for whatever reason compliance does not ensue. No payments are made on the Installment Agreement and no returns are filed for subsequent years. The story takes a familiar turn: no action from the taxpayer until a Collection Due Process letter is sent, at which point Mr. Hermit states “I have no money to pay this [tax liability].”

I won’t rehash the determination of the CDP hearing, or the Tax Court’s order granting the IRS summary judgment, other than to say that your collection alternatives are limited when you fail to file tax returns, which is what happened here. And although the order does not exactly paint the picture of a blameless petitioner in this case, I can’t help but wonder if, much like the prior case, everything could have been fixed years ago with only the proper tax preparation…

Quick Hits, Long Order: Lamprecht v. C.I.R., Dkt. # 14410-15 (here)

When I saw the name “Lamprecht” I immediately thought I was in for an order dealing with Graev (see previous post by William Schmidt here.) I was surprised when I saw that the order was in response to an IRS motion to compel discovery: what documents could the IRS possibly want from the taxpayer to show IRS supervisory approval?

Of course, there is much more to the world of tax than Graev, and the 20 page order deals not with IRC 6751, but contours of what is and is not an acceptable discovery request. Without going into detail, I will simply note that discovery requests that are “unlimited in time” (for example, “all documents relating to Blackacre, EVER”) are likely to be struck as overly burdensome. I will also note that, while the IRS can use discovery as a way to learn about other taxpayers that may have committed fraud, it cannot make such discovery requests for the sole purpose of discovering information about other taxpayers that aren’t in the case at hand. In other words, when the IRS wants to fish for other bad-actors in a tax case it has to hook them with something pertinent to the case at hand.

The two other orders issued during the week of October 8 – 12 concerned a summary judgment motion for a taxpayer that didn’t like having a notice of federal tax lien filed, but gave no alternative for the IRS (or Tax Court) to consider. They can be found (here) and (here) but will not be discussed in detail.

 

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

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.

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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).

 

 

Designated Orders – Discovery Issues, Delinquent Petitioners, and Determination Letters (and some Chenery): August 13 – 17

Designated Order blogger Caleb Smith from University of Minnesota Law School brings us this week’s installment of designated orders. Based on reader feedback we are trying to put more information about the orders into the headlines to better assist you in identifying the cases and issues that will be discussed. Keith

Limitations on Whistleblower Cases and Discovery: Goldstein v. C.I.R., Dkt. # 361-18W (here)

Procedurally Taxing has covered the relatively new field of “whistleblower” cases in Tax Court before (here, here and here are some good reads for those needing a refresher). Goldstein does not necessarily develop the law, but the order can help one better conceptualize the elements of a whistleblower case.

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The statute governing whistleblower awards is found at IRC § 7623. In a nutshell, it provides for awards to tipsters (i.e. “whistleblowers”) that provide information to the IRS that result in collection of tax proceeds. The amount of the award is generally determined and paid out of the proceeds that the whistleblowing brought in. On this skeletal understanding, we can surmise that there are at least two things a whistleblower must do: (1) provide a good enough tip to get the IRS to act, and (2) have that action result in actual, collected money.

Goldstein, unfortunately, fails on the second of these grounds. Apparently, his tip was just good enough to have the IRS act (by initiating an exam, proposing a rather large amount due), but not good enough to go the distance and result in any proceeds: Appeals dropped the case as “no change” largely on “hazards of litigation” grounds. And since whistleblower awards are paid out of proceeds, and the proceeds from the tip here are $0, it stands to reason that Mr. Goldstein was not in for a big payday.

So why does Mr. Goldstein bring the case? Because Mr. Goldstein believes there actually were proceeds from the tip and wants to use the discovery mechanisms of Court as a way to get to the bottom of the matter. Or, somewhat as an alternative, Mr. Goldstein wants to use discovery to show that there should have been proceeds collected from his tip.

The Court is not persuaded by either of these arguments, but for different reasons.

The question of whether the tip “should have” led to proceeds (in this case, through the assessment of tax and penalties as originally proposed in exam) is not one the Court will entertain, for the familiar reason of its “limited jurisdiction.” As the Court explained in Cohen v. C.I.R. jurisdiction in a whistleblower case is only with respect to the Commissioner’s award determination, not the “determination of the alleged tax liability to which the claim pertains.” Arguing that the IRS should have assessed additional tax certainly seems like a look at the alleged tax liability and not the Commissioner’s award determination. So no-go on that tactic.

But the question of whether the IRS actually received proceeds that it is not disclosing -and whether a whistleblower can use discovery to find out- is a bit more interesting. Here, Judge Armen distinguishes Goldstein’s facts from two other whistleblower cases that did allow motions to compel production of documents from the IRS: Whistleblower 11099-13W v. C.I.R., and Whistleblower 10683-13W v. C.I.R..

These cases, in which whistleblowers were able to use discovery to compel production both had one simple, critical, difference from Mr. Goldstein’s case: in both of those cases, there was no question that the IRS had recovered at least some proceeds from the taxpayers. In the present case, there were no proceeds, and so an element of the case is missing… and thus is dismissed.

Of course, in the skeletal way I have summarized Mr. Goldstein’s case it all sounds quite circular: Mr. Goldstein thinks there were proceeds, the IRS says there weren’t, and the Court says “well, we’d let you use discovery to determine the amount of proceeds if there were any. But the IRS says there aren’t any, so we won’t let you use the Court to look further.” In truth, the IRS did much more in Goldstein than just “say” there weren’t any proceeds. The IRS provided the Court with exhibits and transcripts detailing that there were no proceeds, because the case was closed at Appeals.

Also, to be fair to Mr. Goldstein, the reports were significantly redacted (they do deal with a different taxpayer, after all, so one must be wary of IRC § 6103, but not to an extent that causes Judge Armen much worry. And it will take more than a “hunch” for the Court to allow petitioners access to the Court or use of discovery powers.

From the outset of a whistleblower case (that is, providing the “tip”) the IRS holds pretty much all the cards. Here, it appears that the tip could well have ended up bringing in proceeds: at least it was good enough that the examiner proposed a rather large tax. Appeals reversed on “hazards of litigation” grounds –not exactly a signal that they completely disagreed some proceeds could ensue. But the whistleblower, at that point, has no recourse in court to second-guess the IRS decision.

End of an Era? Bell v. C.I.R., Dkt. # 1973-10L (here)

I am often impressed with how far the Tax Court goes out of its way to be charitable to pro se taxpayers. I am also often impressed with the Tax Courts patience. This isn’t our first (or second) run-in with the Bells, though hopefully it is the last (at least for this docket number and these tax years). As the docket number indicates, this collection case has been eight years in the making. Like Judge Gustafson, I will largely refrain from recounting the history (which can be found in the earlier orders) other than to say that the Bells have appeared to vary between dragging their feet and outright refusing to communicate with the IRS over the intervening years. This behavior (kind-of) culminated in the Court dismissing the Bell’s case for failing to respond to an order to show cause.

And yet, they persisted.

Even though the case was closed, the Bell’s insisted on their “day in court” by showing up to calendar call in Winston-Salem while another trial was ongoing. And rather than slam the door, which had been slowly closing for the better part of eight years, the Court allowed the Bells to speak their part during a break in the scheduled proceedings. The assigned IRS attorney, “naively” believing that merely because the case was closed and removed from the docket they would not need to be present, now had to scramble and drive 30 miles to court.

Of course, the outcome was pretty much foreordained anyway. The Bell’s wanted to argue now that they had documents that would make her case. Documents that never, until that very moment in the past eight years, were shared with the IRS or court. The Court generously construed the Bell’s comments as an oral motion for reconsideration (which would be timely, by one day). And then denied the motion, via this designated order.

And so ends the saga… or does it?

In a tantalizing foreshadowing of future judicial resources to be wasted, Judge Gustafson notes that the Bells have previously asked about their ability to appeal the Court’s decision. We wish all the best to the 4th Circuit (presumptively where appeal would take place), should this saga continue.

One can be fairly impressed with the generosity and patience of the Judge Gustafson in working with the pro se parties of Bell. Tax law is difficult, and Tax Court judges frequently go out of their way to act as guides for pro se taxpayers through the maze. But that patience is less apparent where the party should know better -particularly, where the offending party is the IRS…

Things Fall Apart: Anatomy of a Bad Case. Renka, Inc. v. C.I.R., Dkt. # 15988-11R (here)

It is a good bet that the parties are sophisticated when the case deals with a final determination on an Employee Stock Ownership Plan (ESOP). It is an even better bet if the Judge begins the order with a footnote that “assumes the parties’ familiarity with the record, the terms of art in this complicated area of tax law, and the general principles of summary-judgment law.” Needless to say, this is not the sort of case where either of the parties could ignore court orders, show up at calendar after the case was closed, and be allowed to speak their part.

And of course, neither parties go quite that far. However, both procedurally and substantively the arguments of one party (the IRS) fall astoundingly short of the mark.

The IRS and Renka, Inc. are at odds about whether an ESOP qualified as a tax-exempt trust beginning in 1998. The IRS’s determination (that it is not tax-exempt) hinged on the characterization of Renka, Inc. as also including a second entity (ANC) as either a “controlled group” or “affiliated service group.” If this was so, then Renka, Inc.’s ESOP also must be set up to benefit additional employees (i.e., those of ANC), which it did not.

I am no expert on ESOPs, controlled groups, or affiliated service groups, and I do not pretend to be. But you don’t have to be an expert on the substantive law to see that the IRS is grasping. Here is where procedure and administrative law come into play.

The Notice of Determination at issue is for 1998. Although the determination also says the plan is not qualified for the years subsequent to 1998, it is really just looking at the facts in existence during 1998, reaching a determination about 1998, and saying that because of those facts (i.e. non-qualified in 1998), it continues to be non-qualified thereafter. But the critical year of the Notice of Determination is 1998: that is the year that Renka, Inc. has been put on notice for, and it is the determination that is reached for that year that is before the Court. So when the Commissioner says in court, “actually, Renka, Inc. was fine in 1998, but in 1999 (and thereafter) it wasn’t qualified” there are some big problems.

The biggest problem is the Chenery doctrine. Judge Holmes quotes Chenery as holding that “a reviewing court, in dealing with a determination or judgment which an administrative agency alone is authorized to make, must judge the propriety of such action solely by the grounds invoked by the agency.” SEC v. Chenery Corp. (Chenery II), 332 U.S. 194 (1947). The IRS essentially wants to argue that the Notice of Determination for 1998 is correct if only we use the facts of 1999… and apply the determination to 1999 rather than 1998. The Chenery doctrine, however, does not allow an agency to use its original determination as a “place-holder” in this manner. Since all parties agree the ESOP met all the necessary requirements in 1998 (the determination year), the inquiry ends: the Determination was an abuse of discretion.

This is one of those cases where you can tell which way the wind is blowing well before reaching the actual opinion. Before even getting to the heart of Chenery, Judge Holmes summarizes the Commissioner’s argument as being “if we ignore all the things he [the Commissioner] did wrong, then he was right.” And although the IRS has already essentially lost the case on procedural grounds (i.e. arguing about 1999 when it is barred by Chenery), for good measure Judge Holmes also looks at the substantive grounds for that argument.

Amazingly, it only gets worse.

First off, the IRS relies on a proposed regulation for their approach on the substantive law (i.e. that the ESOP did not qualify as a tax-exempt trust). Of course, proposed regulations do not carry the force of law, but only the “power to persuade” (i.e. “Skidmore” deference). And what is the power to persuade? Essentially it is the same as a persuasive argument made on brief. Judge Holmes cites to Tedori v. United States, 211 F.3d 488, 492 (9th Cir. 2000) as support for this idea.

As an aside, I have five hand-written stars in the margin next to that point. I have always struggled with the idea that Skidmore deference means anything other than “look at this argument someone else made once: isn’t it interesting?” It is not a whole lot different than if I (or whomever the party is) made the argument on their own in the brief, except that the quote may be attributed to a more impressive name.

But if there is something worse than over-relying on a proposed regulation for your argument, it would be over-relying on a proposed regulation that was withdrawn well before the tax year at issue. Which is what happened here, since the proposed regulation was withdrawn in 1993. Ouch.

Finally, and just to really make you cringe, Judge Holmes spends a paragraph noting that even if the proposed regulation was (a) not withdrawn, and (b) subject to actual deference, it still would not apply to the facts at hand. In other words, the thrust of the IRS’s substantive argument was an incorrect interpretation of a proposed regulation that was no longer in effect. No Bueno.

There was one final designated order that I will not go into detail on. For those with incurable curiosity, it can be found here and provides a small twist on the common “taxpayers dragging their feet in collections” story, in that this taxpayer was not pro se.

 

Designated Orders 7/16 – 7/20

Caleb Smith from the University of Minnesota brings us this week’s designated orders. The parade of orders involving Graev continues and Professor Smith explains the evidentiary issues present when the IRS seeks to enter the necessary approval form after reopening the Tax Court record. Professor Smith also provides advice, based on another order entered this week, on how to frame your CDP case. A non-procedural matter that might be of interest to some readers is ABA Resolution 102A passed this week, urging Congress to repeal the repeal of the alimony deduction. For those interested in this issue, the resolution contains much background on the deduction.  Keith

Submitting Evidence of Supervisory Approval Post-Graev III

Last week, William Schmidt covered three designated orders that dealt with motions to reopen the record to submit evidence of supervisory approval under IRC 6751. I keep waiting for this particular strain of post-Graev III clean-up to cease, but to no avail: the week of July 16 two more designated orders on issues of reopening the record were issued. Luckily, there are important lessons that can be gleaned from some of these orders on issues that have nothing to do with reopening the record (something that post-Graev III cases shouldn’t have to worry about). Rather, these cases are helpful on the evidentiary issues of getting supervisory approval forms into the record in the first place.

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Choosing the Right Hearsay “Exception” Fakiris v. C.I.R., dkt. # 18292-12 (here)

In Fakiris, the IRS was once again confronted with the issues of (1) reopening the record to get supervisory approval forms into it, and (2) objections to those forms on hearsay grounds. At the outset (for those paying attention to docket numbers), one may be forgiven for wondering how it is even possible that this case was not decided well before Graev III. The briefing in Fakiris was completed in August, 2014 with no apparent court action until June, 2017. Judge Gale walks us through the procedural milestones in a footnote: although a decision was entered for the IRS about a year ago in T.C. Memo. 2017-126, the IRS filed a motion to vacate or revise (surprisingly, since they appear to have won on all fronts). The decision that the IRS sought to vacate includes a footnote (FN 20) providing that because petitioner did not raise a 6751 issue, it is deemed conceded. At the time, there was some uncertainty about whether the taxpayer had to affirmatively raise the issue, or whether it was a part of the IRS’s burden of production under Higbee. See earlier post from Carl Smith.

In any event, and no matter how old the case may be, it is still before the Court and the record must still be reopened for the IRS to succeed on the IRC 6751 issue. After the usual explanation of why it is proper for the Court to exercise its discretion to reopen the record, we arrive at the evidentiary issue: isn’t a supervisory approval form hearsay? At least so objects petitioner.

Where petitioners object to IRS supervisory approval forms as “hearsay” it appears to be the standard operating procedure of IRS counsel to argue the “business records” exception (see FRE 803(b)). Generally, the IRS prevails on this theory, but this theory creates potentially needless pitfalls. Fakiris demonstrates those pitfalls, noting that under the business record exception the IRS has certain foundational requirements it must meet “either by certification, see 902(11), Fed. R. Evid. [here], or through the testimony of the custodian or another qualified witness, see Rule 803(6)(D), Fed. R. Evid.” Without that foundation, the business records exception cannot hold -and indeed, in Fakiris the IRS lacks this foundation and is left spending more time and resources to go back and build it as their proffered evidence is excluded from the record.

So how does one avoid the time-consuming, perilous path of the “business exception?” Judge Gale drops a rather large hint in footnote 9: “We note that Exhibits A and B [the actual penalty approval forms] might also constitute “verbal acts”, i.e., a category of statements excluded from hearsay because ‘the statement itself affects the legal rights of the parties or is a circumstance bearing on conduct affecting their rights.’” If it is a “verbal act” it is categorically not hearsay (and not an “exception” to the hearsay rule). I have made exactly this argument before, although I referred to verbal act as “independent legal significance.” I am surprised that the IRS does not uniformly advanced this argument. In the instances that the IRS used it, the IRS has prevailed (as covered in the designated orders of the previous week). Judge Gale also refers to the advisory committee’s note to bolster the argument that the supervisory approval form is not hearsay: “If the significance of an offered statement lies solely in the fact that it was made, no issue is raised as to the truth of anything asserted, and the statement is not hearsay.” Advisory Committee Note on FRE 801(c) [here]. To me, that is what appears to be happening here. The IRS is simply trying to prove that a statement was made (i.e. a supervisor said “I approve of this penalty.”) The penalty approval form is that statement. It is absurd to think that the form is being offered for any other purpose (e.g. as evidence that the taxpayer actually was negligent, etc.).

If you don’t believe me (or Judge Gale), perhaps Judge Holmes will change your mind? In a designated order covered last week in Baca v. C.I.R., the IRS prevails on a theory that the supervisory approval form is a verbal act, without relying on the business exception. In reaching that determination, Judge Holmes references not only the FRE advisory committee note on point, but also Gen. Tire of Miami Beach, Inc. v. NLRB, 332 F.2d 58 (5th Cir. 1964) providing that a statement is a nonhearsay verbal act if “inquiry is not the truth of the words said, merely whether they were said.”

If you just aren’t sold on the “verbal acts” argument, Judge Gale’s Footnote 9 has yet more to offer. As a second possible avenue for getting the penalty approval form into evidence, Judge Gale suggests the public records exception of FRE 803(8). This exception to hearsay requires proper certification, but apparently has been successfully used by the IRS in the past with Form 4340 (See U.S. v. Dickert, 635 F. App’x 844 (11th Cir. 2016)).

All of this is to say, I think the IRS has ample grounds for getting the supervisory approval form properly into evidence. For petitioners, though it is likely a losing argument, if there are actual evidentiary concerns you must be sure to properly raise those objections -even if in the stipulation of facts. A second designated order issued the same week as Fakiris (found here) does not even get to the question of whether the forms are hearsay after reopening the record -presumably because the objections were never raised (the docket does not show a response by petitioner to the IRS’s motion to reopen the record).

Setting Yourself Up for Favorable Judicial Review on CDP Cases: Jackson v. C.I.R., dkt. # 16854-17SL (here)

Taxpayers that are unable to reach an agreement with the IRS on collection alternatives at a Collection Due Process (CDP) hearing generally have an uphill battle to get where they want to go. Yes, they can get Tax Court review of the IRS determination, but that review is under a fairly vague “abuse of discretion” standard. Still, there are things that petitioners can do to better situate themselves for that review.

At an ABA Tax Section meeting years ago, a practitioner recommended memorializing almost everything that is discussed in letters to IRS Appeals. Since the jurisdiction I practice in is subject to the Robinette “admin record rule,” it is especially important to get as much as possible into the record. Conversely, one may argue that the record is so undeveloped that it should be remanded because there is nothing for the Court to even review: see e.g. Wadleigh v. C.I.R., 134 T.C. 280 (2010). The order in Jackson provides another lesson: how to frame the issue before the Court.

In Jackson, the taxpayers owed roughly $45,000 for 2012 – 2015 taxes due to underwithholding. After receiving a Notice of Intent to Levy, the Jacksons timely requested a CDP hearing, checking the boxes for “Offer in Compromise,” “I Cannot Pay Balance,” and “Installment Agreement” on their submitted Form 12153. Over the course of the hearing, however, the only real issue that was discussed was an installment agreement -albeit, a “partial pay” installment agreement (PPIA). A PPIA is essentially an installment agreement with terms that will not fully pay the liability before the collection statute expiration date (CSED) occurs.

Obviously, the IRS is less inclined to accept a PPIA than a normal installment agreement, because a PPIA basically agrees to forgive a part of the liability by operation of the CSED. Sensibly, IRS Appeals required a Form 433-A from the Jacksons to determine if a PPIA made sense.

The Form 433-A submitted by the Jacksons appears to have pushed the envelope a bit. Most notably, the Jacksons claimed $740 for monthly phone and TV expenses (the ultra-deluxe HBO package?) and $629 per month in (voluntary) retirement contributions as necessary expenses. The settlement officer downwardly adjusted both of these figures (and possibly others) pursuant to the applicable IRM, and determined that the Jacksons could afford to pay much more than the $300/month they were offering. Going slightly above and beyond, the settlement officer proposed an “expanded” installment agreement (i.e. one that goes beyond the typical 72 months) of $1,100 per month. The Jackson’s rejected this, but appear to have proposed nothing in its stead. Accordingly, the settlement officer determined that the proposed levy should be sustained.

Judge Armen notes that with installment agreements (as with most collection alternatives under an abuse of discretion standard of review), “the Court does not substitute its judgment for that of the Appeals Office[.]” Sulphur Manor, Inc. v. C.I.R., T.C. Memo. 2017-95. If the IRS “followed all statutory and administrative guidelines and provided a reasoned, balanced decision, the Court will not reweigh the equities.” Thompson v. C.I.R., 140 T.C. 173, 179 (2013).

The Thompson and Sulphur Manor, Inc. cases provide, in the negative, what a petitioner must argue for any chance on review. Starting with Sulphur Manor, Inc., the petitioner must strive to present the question as something other than a battle of who has the “better” idea. In other words, don’t frame it as a battle of bad judgment (IRS Appeals) vs. good judgment (petitioner). If it must be a question of judgment, then Thompson gives the next hint on how to frame the issue: not that the IRS exercised “bad” judgment, but that they didn’t provide any reasoning for their decision in the first place (i.e. that they did not “provide a reasoned, balanced decision”). A lack of reasoning is akin to an “arbitrary” decision, which is by definition an abuse of discretion.

Better than framing the determination as lacking any reasoning, however, is where the petitioner can point to “statutory and administrative guidelines” that the IRS did not follow. Of course, this is difficult in collection issues because there are generally fairly few statutory guidelines the IRS must follow in the first place. But administrative guidelines do exist in abundance, at least in the IRM. Of course, this cuts both ways: the IRM can also provide cover for the IRS when it is followed, but appears to get to an unjust outcome.

Returning to the facts of Jackson, the petitioner faced an extremely uphill (ultimately losing) battle. It is basically brought before the Court as a request for relief on the grounds that the taxpayer just doesn’t like what the IRS proposes. As Judge Armen more charitably characterizes the case, by failing to engage in further negotiations with Appeals on a proper amount of monthly installment payments, “petitioners framed the issue for decision by the Court as whether the settlement officer, in declining to accept their offer of a partial payment installment agreement in the monthly amount of $300, abused her discretion by acting without a reasonable basis in fact or law.” This is asking for a pretty heavy lift of the Court, since there is no statute that provides the IRS must accept partial pay agreements, and the facts show the IRM was followed by the IRS. Not surprisingly, the Court declines to find an abuse of discretion.

Odds and Ends: Remaining Designated Orders

End of an Era? Chapman v. C.I.R., Dkt. # 3007-18 (here)

The Chapmans appear to be Tax Court “hobbyists” -individuals that enjoy making arguments in court more than most tax attorneys, and generally with frivolous arguments. The tax years at issue (going back to 1999) have numerous docket numbers assigned to them both in Tax Court and the 11th Circuit, all with the same general take-away: you have no legitimate argument, you owe the tax. But could this most recent action be the secret, silver bullet? Could this newfound argument, that they are not “taxpayers” subject to the Federal income tax when the liability is due to a substitute for return, be their saving grace?

Nope. All that argument does is get them slapped with a $3,000 penalty under IRC 6673(a). One hopes this is the end of the saga.

The Vagaries of Partnership Procedure: Freedman v. C.I.R., dkt. # 23410-14 (here)

Freedman involves an IRS motion to dismiss for lack of jurisdiction the portion of an individual’s case that concerns penalties the IRS argues were already dealt with in a prior partnership-level case. For a fun, late-summer read on the procedures under TEFRA for assessment and collection against a partner, after a partnership-level adjustment, this order is recommended.

 

Designated Orders June 18 – 22: Mailing Issues

Caleb Smith from University of Minnesota brings us this week’s designated orders. Two of the orders present interesting issues regarding the mail and the Court’s jurisdiction. One concerns the timing of the mailing by the petitioner while the other concerns the location of the mailing by the IRS. As with almost all mailing issues, the jurisdiction of the Court hangs in the balance. Keith

There is yet no sign of summer vacation in D.C., as the Tax Court continued to issue designated orders the week of June 18. Indeed, if the Tax Court judges are hoping to get away from the office for a while their orders don’t show it: one of the more interesting ones comes from Judge Gustafson raising sua sponte an interesting jurisdictional question for the parties to address. We begin with a look at that case.

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The Importance of Postmarks: Murfam Enterprises LLC, et.al v. C.I.R., Dkt. # 8039-16 (order here)

Most of this order deals with Judge Gustafson essentially directing the parties to play nice with each other. The order results from petitioner’s motion to compel the IRS to respond to interrogatories and to compel the IRS to produce documents. Since litigation in Tax Court is largely built around informal discovery and the stipulation process, there usually needs to be some sort of break-down between the parties before the Court will step-in to compel discovery.

One could read this order for a study of the boundaries of zealous (or over-zealous) representation of your client. Some of the deadlines proposed by petitioners for the IRS to respond appear to be less than fair, and it does not appear that petitioners tried too hard to work things out with the IRS prior to filing the motions to compel -according to the IRS, only one call was made, before business hours, without leaving a message. All of this leads to a mild tsk-tsk from Judge Gustafson: “communication during the discovery process and prior to the filing of the subject motions has been inadequate.”

But the more interesting issue, in my opinion, is the jurisdictional one that Judge Gustafson raises later. It is, after all, an issue that could render all of the discovery (and the entire case) largely moot: did Murfam mail the petition on time?

Judge Gustafson notes that under the applicable law, a tax matters partner must petition the court within 90 days after the notice of Final Partnership Administrative Adjustment (FPAA) is mailed. We are told that the IRS mailed the FPAA on December 21, 2015, which we may as well accept as true for present purposes. (As a practitioner, one should note that the IRS date on the notice is not always the date of the actual mailing, which would control. See post here. Assuming the FPAA was actually mailed on December 21, 2015, Murfam would need to mail their petition by March 21, 2016, because 90 days later (March 20) falls on a Sunday. See IRC 7503.

This appears to be an easy question: did Murfam mail the petition by March 21, 2016? Because the Court did not actually receive the petition until April 2, 2016, we get into the “timely mailing” rules of IRC 7502. And here things get interesting. The envelope in which the petition was sent has a mostly illegible postmark. The day the petition was mailed is smudged, and may be either March 16 or March 26. The problem is, only one of those two dates (i.e. the 16th) is a timely mailing.

Carl Smith recently posted on the Treasury Regulation on point for these sorts of issues, with the interesting question of whether there is any room left for the common law mailbox rule in the same sphere as the Treasury Regulation. A slightly different question exists in Murfam, and the regulation specifically provides what to do with “illegible postmarks” at Treas. Reg. § 301.7502-1(c)(1)(iii)(A). Essentially, it provides that the burden of proof is on the sender to show the correct date. How, exactly, would one be expected to do that? That is where things would likely become difficult, and the practitioner may need to be creative. Though not quite the same issue, my favorite case for proving mailing is the Estate of Wood v. C.I.R., 909 F.2d 1155 (8th Cir. 1990) taking place in small-town Easton, Minnesota… a place where, much like Cheers, everybody knows your name. So much so that the “postmistress” was able to credibly testify that she specifically remembered sending the tax return in the mail on the day in question. It is unclear whether Murfam could rely on similar credible testimony to prove the date of the mailing.

I would also note that, at present, this is likely more of an academic point than anything else: the parties can stipulate that the petition was timely filed (and while I cannot access their stipulations, my suspicion is that they came to an agreement on that point… how much more efficiently things do progress when the parties work together). But, apart from again serving as a reminder on the importance of sending (certain) mail certified, the point to keep in mind is the evidentiary issues that can easily arise when mailing important documents.

The Importance of Addresses: Gamino v. C.I.R., dkt. # 12773-17S (order here)

Lest the importance of proper mailing issues be doubted, it should be noted that there was another designated order issued the same day primarily concerning mailing addresses. In Gamino, the IRS sent out a Notice of Deficiency (NOD) to the taxpayer at two different addresses. Those delivery attempts were in May of 2015. The petition that the taxpayer sent, and which Judge Guy dismissed for lack of jurisdiction, was mailed in May of 2017. Clearly the 90 days have passed. The only argument remaining for the taxpayer would involve, not the date of the mailing, but the address.

Neither of the NODs appear to have been “actually” received by the taxpayer at either address, although that may well have been by the taxpayers refusal to accept them -the NOD sent to the address the taxpayer was known to live at was marked “unclaimed” after multiple delivery attempts. However, actual receipt is not necessary for an effective NOD so long as it is sent to the “last known address.” Here the Court does not go into great detail of how to determine what the correct last known address would be. In fact, it appears as if that may be an issue, since the Court is squarely confronted with whether it was an effective mailing. But rather than dredge up the last filed tax return (perhaps Mr. Gamino never files?) or the other traditional methods the Service relies on for determining the last known address (see Treas. Reg. 301.6212-2) the Court relies on the petitioner effectively shooting himself in the foot during a hearing. That is, the fact that at a hearing on the issue Mr. Gamino “acknowledged that he had been living at the [address one of the NODs was sent to] for over 10 years.” No other information or argument is given as to why this should be treated as the proper “last known address,” but “under the circumstances” the Court is willing to treat it as such.

This order leaves me a bit torn. From a purely academic standpoint, it is not clear to me that just because the taxpayer was actually living somewhere that place should be treated as their “last known address.” In fact, that seems to go against the core concept behind the last known address and constructive receipt: it isn’t where you actually live, it is where the IRS (reasonably should) believe you to live. So the IRS sending a letter to anywhere other than my last known address should, arguably, only be effective on actual receipt.

On the other hand, a taxpayer shouldn’t be able to throw a wrench in tax administration just by refusing mail from the IRS. One could argue that such a refusal is “actual receipt” of the mail. In that respect, I would bet that Judge Guy got to the correct outcome in this case. But the order is nonetheless something of an anomaly on that point, since there should be much easier ways to show “last known address” and “actually living” at the address isn’t one of them. My bet is that the IRS couldn’t point to the address on the last filed return as the taxpayer’s “last known address” because that address may well have been a P.O. box (where one of the two NODs was sent, and returned as undeliverable). Taxpayers certainly shouldn’t be able circumvent the valid assessment of tax by providing undeliverable addresses… Although, even if you don’t “live” at a P.O. box, if that was the address you used on your last tax return, shouldn’t that be enough for a valid last known address? Truly, my mind boggles at these questions.

Changed Circumstances and Collection Due Process: The Importance of Court Review

English v. C.I.R., Dkt. # 16134-16L (order here)

On occasion, I wonder just how IRS employees view the role of “collection due process” in the framework of tax administration. Is it a chance to earnestly work with taxpayers on the best way of collecting (or perhaps foregoing) collecting tax revenue? Or is it just one more expensive and time-consuming barrier to collecting from delinquents? With some IRS employees (and counsel) I get the feeling that if they had to choose, they would characterize it as the latter. The above order strikes me as an example of that mindset.

Mr. English appears to be pursuing a collection alternative to levy, and is dealing with serious medical issues. I obviously do not have access to his financial details, but it should be noted that he is pro se, and that his filing fee was waived by the Court. This isn’t to guarantee that Mr. English may be dealing with financial hardship, but it is a decent indicator.

Further, this does not appear to be a case where the taxpayer simply never files a tax return and/or never submits financial information statements. In this case, the issue was the quality of the financial statements that were submitted (apparently incomplete, and with some expenses unsubstantiated). IRS appeals determined that Mr. English could full pay and sustained the levy. IRS counsel likely thought they could score a quick win on the case through summary judgment.

But that does not happen in this case, and for good reason.

Since the time of the original CDP hearing, Mr. English’s medical (and by extension, financial) position has seriously deteriorated. For one, he is now unemployed. For another, his left leg was amputated above the knee. The amputation occurred in late September, 2016. The unemployment was in July of 2017. In other words, both occurred well before the IRS filed a motion for summary judgment in 2018. Why did IRS counsel think that summary judgment upholding the levy recommendation, made by an IRS Appeals officer that was confronted with neither of those issues, was right decision? I have truly no idea. But I’ve come across enough overworked IRS attorneys to have a sense…

Fortunately, we have Judge Buch who apparently does appreciate the value of CDP. It is not clear whether Mr. English made any motion for remand to IRS appeals (it actually appears that he did not), but Judge Buch sees Mr. English’s “material change in circumstance” as good enough reason for it. And so, at the very least, the judicial review afforded CDP hearing provides Mr. English with another chance to make his case.

Odds and Ends

The remaining designated orders will not be given much analysis. One illustrates the opposite side of Mr. English in a CDP case: the taxpayer that does pretty much nothing other than petition the Court, while giving essentially no financials or other reasons for the IRS Appeals determination to be upheld (order here). The other deals with an apparently wrong-headed argument by an estate to exclude an IRS expert report (order here).

 

Designated Orders: 5/21/18 to 5/25/18 by Caleb Smith

In this installment of designated orders covering the week of May 21, guest blogger Caleb Smith of the University of Minnesota covers several deficiency cases in which the taxpayer failed to carry their burden of proof. Professor Smith also updates us on a few Graev issues including a Chief Counsel Notice from June 6 which will be the subject of additional discussion on this blog and elsewhere. Christine

Knowing When To Hold ‘Em and When To Fold ‘Em

Chief Special Trial Judge Carluzzo cleaned house with designated orders through three bench opinions on S-Cases. These cases didn’t have much in common except that the taxpayer probably never should have gone to trial. Two of the cases deal mostly with evidence and credibility issues (and the same IRS trial attorney for both), and one deals with too-good-to-be true legal arguments. We’ll start with the evidence/credibility issues.

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It is not uncommon that I come across IRS examiners (or law students) that harbor the belief that there is one particular document (and one particular document only) that a taxpayer needs in order to “prove” something. For law students, I suspect this is an offshoot of reading mostly appellate decisions where the facts are already set in stone. For IRS examiners, I suspect this is an offshoot of reading mostly the IRM and mistaking it for the law.

In any event, most of the time there are some documents that are better than others and some sources of evidence that are more reliable (and likely to be considered credible) than others, but usually your job is simply to show something convincing to the finder of fact. Where documentary evidence should exist (for example, a lease or bank records) you can be sure that the IRS is going to bring that issue up. Part of being a lawyer is gauging the likelihood of success on the evidence you do have, and if there is a compelling and credible narrative for why certain documents don’t exist, advising and planning accordingly. Fuller v. C.I.R. (dkt. # 14627-17S) is one instance where candid advice on review of the evidence would be “you have no chance in court.” Hadrami v. C.I.R. (dkt. # 11377-17S) is another.

In Fuller, the taxpayer claimed some rather large itemized deductions – the size of which (relative to income) likely tripped up the IRS smell-test known as Discriminant Inventory Function (DIF) selection. Here, we are not given the taxpayer’s reported income, but we do have some fairly eye-popping deductions: $41,628 for medical, $24,237 for charitable contributions, and $12,567 for unreimbursed employee expenses. Oh, and $850 in tax preparation fees for purchasing tax preparation software (the Turbo-Tax super-elite premium package?). Failing the smell-test, what evidence does the taxpayer have to convince the fact-finder of the propriety of her deductions?

Not a scrap of paper. And testimony that basically works against her as a matter of law. These are not auspicious circumstances.

To begin with, the charitable deductions already present an uphill battle since they require strict substantiation. Ms. Fuller has nothing for them, but does have the (apparent) excuse that her records have been destroyed by household floods. The loss of records in a flood or disaster area is an actual, recognized exception, but it isn’t going to do the trick here – at least in part because the taxpayer can’t explain why other third party records (presumably not subject to floods) don’t exist. Why no bank records of these massive contributions? The same question applies with equal force to the medical expenses and tax preparation fees.

The unreimbursed employee expenses of $12,567 present a different issue. Apparently these expenses stem from a home office. Two immediate legal issues come up: (1) as an employee, is this home office maintained for the convenience of the employer (see Hamacher v. C.I.R., 94 T.C. 348, (1990)), and (2) the usual killer, is the home office exclusively used on a regular basis as the principal place of business (see IRC 280A(c)(1))? Since the taxpayer’s own testimony is that the “home office” is her dining room table where she worked a couple days a week, winning advice would be that she is “unlikely” to succeed. And sure enough, she does not.

Hadrami is a twist on Fuller: documents exist and are introduced by the taxpayer, but they only serve to undermine his testimony. Hadrami was (or claimed to be) a limousine driver, providing his lucky riders a taste of the good life in a 2003 Lincoln Town Car… that had at least 291,380 miles on it in 2012. When Hadrami claims to have purchased the car from the limousine operating company, “Rim Limo,” in 2013 the odometer (allegedly) read 320,673 miles. Interestingly enough, when the DMV has record of the taxpayer purchasing the car in 2014, the odometer continued to read 320,673 miles. Judge Carluzzo notes that something is amiss.

Judge Carluzzo determines that it is doubtful that the taxpayer actually owned the vehicle for the tax year in question (2013). This is especially so as the Rim Limo job required him to park the limo and “return home” in his own car. The mileage log offered by the taxpayer “raises more questions than it answers.” One interesting substantive legal note in this case deserves mention on that point, which is that these expenses were NOT subject to the strict substantiation requirements we usually see trip up taxpayers, and accordingly the Cohan rule would apply. Judge Carluzzo notes that the definition of passenger automobiles (i.e. the listed property usually prompting strict substantiation) does NOT include vehicles used by the taxpayer directly in the trade or business of transporting persons for compensation or hire. See IRC 280F(d)(5)(B). As someone who routinely comes across Uber drivers subject to audit with partial, but not sterling, records of expenses, I find this to be a noteworthy point.

The taxpayer also offers his Wells Fargo bank records to substantiate other expenses (for example, over $1000 in meals and entertainment)… but apparently does not actually delineate where in his records those expenses are to be found. Handing a stack of papers to someone and saying “please find deductions for me” is what you do with your tax preparer, not a Tax Court Judge or IRS attorney. Speaking of tax preparers…

The return that prompted this whole ordeal apparently was prepared with the help of a tax “professional.” As usual, the “professional” saw nothing wrong with claiming (and the taxpayer nothing wrong with incurring) a $22,253 net loss from driving a limo. I suppose one goes into the limo business more for the love of carting around prom-goers than for the money. That, or some people just can’t say no to tax outcomes that seem too good to be true…

Which brings us to the last in Judge Carluzzo’s trilogy of bench opinions: Rykert v. C.I.R., Dkt. # 10427-17. Rather than a “tax professional” preparing questionable returns, Judge Carluzzo worries that Mr. Rykert may have been taken in by “advice he was receiving from an organization whose status to practice law is questionable.” In other words, the “only suckers pay tax” crowd that appear to have found technicalities with every aspect of our tax administration. This particular strain appears to be challenging who actually has the authority to sign a Notice of Deficiency at the IRS and what makes for a valid Notice of Deficiency (the taxpayer does not appear to disagree with any of the substantive items therein).

With what appears to be very genuine concern for a misguided petitioner, Judge Carluzzo does not throw out the case but instead grants an oral motion for continuance in the hope that Petitioner secures counsel and the matter resolves itself without trial. Presumably, that counsel will know whether to hold or fold. As to whether petitioner heeds that advice, one can only hope. A similar designated order (this time from Judge Cohen) suggests that some taxpayers probably just won’t take advice when it isn’t the outcome they want. In Loetscher v. C.I.R., dkt. # 10197-17L, the petitioner raises numerous tax protestor or otherwise frivolous arguments, and is warned of the possibility of penalties up to $25,000. Judge Cohen tries valiantly to bring the light of reason to the petitioner, but notes that the petitioner “failed to consult with the volunteer lawyers present and available” and “when the Court made a last attempt to persuade her to abandon the erroneous approach she [the petitioner] responded ‘I’m sticking to what I said about that.’” Not surprisingly, petitioner soon lost her case.

Graev Updates

The most substantive Graev order (found here and dealing with jeopardy assessments) has already been dealt with earlier in a stand-alone post here. I commend readers that haven’t had a chance to read it, and particularly the insightful comments posted thereunder.

A second Graev designated order was issued by Judge Holmes in Humiston v. C.I.R., dkt. # 25787-16L. This order provides still more insight on this rapidly developing area of law. It does so on two areas: (1) under what circumstances a taxpayer must specifically raise the issue of IRC 6571(b) compliance, and (2) with much less detail, what penalties are exempt IRC 6751(b)(2)(B) as “automatically calculated by electronic means.”

On the issue of whether a taxpayer must specifically raise the issue of IRC 6751 compliance, Judge Holmes raises a few questions. First, Judge Holmes notes that the taxpayer did not put IRC 6751 compliance at issue, and that generally that means it must be conceded. Since it is a summary judgement motion by the IRS, the taxpayer is pro se, and the issue is “cutting edge,” Judge Holmes ultimately lets the taxpayer off the hook for that potential problem. But what is interesting to me is how Judge Holmes phrases what the “error” is. This is a collection due process case, and the problem isn’t that the taxpayer specifically fails to put the penalty at issue. It is that the taxpayer doesn’t raise the issue of the settlement officer (SO) failing to verify all applicable law was followed per IRC 6330(c)(1). This potentially bolsters the reading that in a CDP case, verifying IRC 6751(b) compliance is part and parcel of the SO’s responsibilities under IRC 6330(c)(1) -which would be especially important for taxpayers who failed to challenge a penalty on a Notice of Deficiency that they previously (actually) received. The recently decided precedential opinion in Blackburn v. C.I.R., 150 T.C. No. 9 (2018) somewhat addresses this issue, but that case mostly stands for the proposition that there is no requirement to “look behind” the supervisory approval, if it exists. Although the boilerplate “I verified that all applicable law was followed” will not suffice on its own, some written record of supervisory approval is likely enough. A very recent Chief Counsel memorandum (CC-2018-006) describes the section 6751(b) verification requirement in a CDP case as as part of the section 6330(c) requirement even where the liability is not at issue, but notes that the IRS does not have the burden of production in such a case. In other words, the taxpayer may need to do a little more to put it at issue before the court.

Although it was only a footnote in a non-precedential designated order, one other aspect of the Humiston decision bears mention. It isn’t immediately clear whether the IRS argued that the penalty at issue (in this case, a Trust Fund Recovery Penalty (TFRP)) did not need section 6751 compliance, and it appears as if the SO simply failed to consider it at all. Nonetheless, Judge Holmes puts a stamp of disapproval on the notion that TFRPs would not need to meet IRC 6751(b) requirements,  both because they are penalties “under the code” and because it is doubtful to Judge Holmes’ mind that they could be automatically calculated through electronic means (the IRC 6751(b)(2)(B)) exception). This is important because in Blackburn the IRS explicitly made the argument in the alternative that IRC 6751 didn’t apply to TFRPs. The Court didn’t rule on that issue because it found compliance by the IRS anyway. My reading of the not-so-subtle tea leaves in Judge Holmes’ designated order is that the Court would almost certainly find section 6751 to apply to TFRPs if that issue was squarely before it.

Final Clean Up

There were two other designated orders for the week of May 21 that will not be discussed in this post. One was from Judge Jacobs granting a motion for continuance and remand (found here), and one was from Judge Thornton denying a motion to vacate or revise the Court’s opinion (found here).

When to Waive CDP Rights

Professor Caleb Smith discusses Toney Jr. v. C.I.R., Dkt. # 25496-16SL, a designated order from a few weeks ago. Rather than embed the discussion in Caleb’s DO Post, we have split this off to discuss issues surrounding waiving CDP rights, with Caleb looking for input from readers who may have considered what is the best practice when reaching an agreement with a Settlement Officer in a CDP case . Les

The order in Toney v Commissioner actually deals with the oft questioned “prior chance to argue the underlying tax” blogged about hereand here among others. The case is a pretty clear loser on that point, since Mr. Toney had previously had Appeals conferences and argued the tax.  But it got me thinking about a different issue that I have had with the IRS: specifically, how to approach Form 12257 “Waiver of CDP Rights and Summary Notice of Determination” from both legal and tactical perspectives.

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In Toney, the taxpayer and the IRS settlement officer came to an agreement to full-pay the liability within 60 days. The settlement officer prepared the 60-day extension form and a Form 12257 “Summary Notice of Determination” and sent it to Mr. Toney. A Notice of Determination (and the judicial review it affords) seemed unwarranted, since both parties agreed on the proper outcome.

But for reasons unknown Mr. Toney did not full pay and did not sign the Form 12257. The IRS settlement officer got tired of waiting and sent a Notice of Determination sustaining the lien instead.

From the outset it is important to note that Form 12257 is likely NOT a determination for IRC 6330(d)(1)purposes, despite having the phrase “Summary Notice of Determination” as its header. It is really more of a contract, and in any case too contingent to be a “determination.” For one, the taxpayer has to sign it to give it force, and for two even if the taxpayer signs it, it still requires secondary approval by an IRS Appeals manager.  See Fine v. C.I.R., T.C. Memo. 2016-217. In any event, the IRS does not treat it as a Notice of Determination (and no Tax Court decision has either): if the taxpayer does not sign and return Form 12257, the IRS sends an actual Notice of Determination to the taxpayer later.

Because it is not a Notice of Determination, it neither starts the clock running on petitioning Tax Court nor gives the Tax Court jurisdiction on such a petition. In other words, nothing much happens until you sign and have the Form 12257 approved or the IRS gets tired of waiting and sends an actual Notice of Determination.

And that is where the question of tactics arises. After a CDP hearing in which there appears to be a meeting of the minds on the correct outcome, a friendly IRS Appeals/Settlement officer will often suggest signing a Form 12257 to “speed up the process.” For example, if both parties agree that the taxpayer should be eligible for a payment plan of $100/month, why even retain judicial review? Why not just enter into the plan and waive the right to review?

One might be concerned that after waiving the right to judicial review the IRS will take some action that seems inconsistent with (or just completely reneges on) the agreement the parties came to. Not to worry, the IRS Appeals/Settlement Officer may retort: the very terms of Form 12257 provide “I [the taxpayer] do not waive my right under Appeals’ retained jurisdiction to receive another hearing with Appeals if I disagree with the IRS over how it followed Appeals’ determination.”  In other words, Appeals still has your back if the IRS doesn’t follow through on its apparent promises.

Yet believe it or not, having Appeals retain jurisdiction but without Court review is likely cold comfort for many practitioners. Generally, I give fairly high marks to IRS Appeals… when it is localIRS Appeals. When the IRS Appeals/Settlement officer is at a “campus” (Fresno comes to mind) my experiences have been, shall we say, less encouraging. It is in precisely those situations that I am reluctant to sign away the right to judicial review.

Perhaps because of this the best practice is to insist on an ACTUAL Notice of Determination. On the downside, this slows things down and creates more work for the IRS which in turn might not make for the most collegial relationship with the Appeals/Settlement officer. On the plus side, you’re here to look out for your client’s interests not the workload of the IRS, and frankly because part of the problem stems from impersonal IRS campus officers, developing relationships with them might be close to impossible. I can think of exactly one campus AO that I’ve had twice, and I’m not positive she remembered me. Of course, some consideration hinges on just how valuable Tax Court review of a collection action is under the fairly permissive “abuse of discretion” standard of review.

But assuming (as I do) that having access to Tax Court review is better than not, a problem remains. In the hypothetical I’ve proposed, you have reached a meeting of the minds with the IRS after a CDP hearing. Say both parties agree to an Installment Agreement and that the IRS will release a lien after three monthly payments are made. You nonetheless insist on a Notice of Determination, since you’d rather have the option of court review than not: you trust the Appeals/Settlement Officer but want to be sure the IRS follows through.

What good is the Notice of Determination in that instance? If three months later the IRS does not withdraw the lien what judicial review do you have? Your ticket has expired by the time you have cause to use it. I suppose one could argue on some sort of contract theory ground that failure of the IRS to properly follow through with the Form 12257 terms should be litigable. But I’d rather not mess around with that, and I’m not sure that in any case the Tax Court (which, lest we forget, is of eminently limited jurisdiction) would be amenable to the argument.

And so I end with a humble question to the readers of PT on this conundrum: what are the best practices you’ve found for working with Form 12257? Has it been an issue? Have you had post-CDP actions taken by the IRS that have caught you off-guard (either from Form 12257 or a Notice of Determination)?