Designated Orders for the week of August 27, 2018: A Pause for Coffey, a New Flavor of Chai, and the Court and Technology.

Professor Samantha Galvin from University of Denver’s Sturm School of Law brings us this week’s designated orders.  Keith

The week of August 27th was light, in typical pre-holiday week fashion, with a total of five orders designated. The two orders not discussed involve: 1) the final decision on a petitioner’s request to dismiss his case without prejudice (a case Patrick Thomas previously blogged about) (here), and 2) an order to show cause for the non-imposition of a section 6673(a)(1) penalty (here).

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A Pause for Coffey

Docket No: 7976-14, Bradley A. Hite v. C.I.R. (Order here)

The Tax Court’s opinion in Coffey v. Commissioner issued earlier this year held that U.S. Virgin Island (“USVI”) territorial income tax returns submitted to an IRS office constitute the filing of a federal income tax return and start the clock on the assessment statute under section 6051(a). Patrick Thomas also blogged about two orders that were recently designated as part of the Coffey case here and here and the Coffey case was covered by Kandyce Korotky and Joe DiRuzzo (if interested, see links in Patrick’s first post).

In this designated order the Court contemplates granting respondent’s Motion for Leave to File Out of Time First Amendment to Answer in a case involving USVI returns. The case itself involves a question of whether petitioner’s 2002 and 2003 USVI territorial tax returns should be treated as filed with the IRS.  Petitioner had initially alleged that his USVI territorial tax returns should be treated as federal income tax returns for purpose of the assessment statute but did not allege that he had actually filed the returns at issue with the IRS. Petitioner later admitted in a reply to respondent’s answer that he did not file the returns at issue with the IRS.

In response to petitioner’s statements and the decision in Coffey, respondent wants to amend his answer to clarify that if the returns are treated as filed with the IRS, then the January 2014 notice of deficiency was sent before the expiration of the assessment statute under section 6501(a) and the parties executed agreements to extend the assessment statute under section 6501(c)(4). It is a little difficult to discern from the order itself but it appears the reason for this is that even though petitioner admitted to not filing a return with the IRS, if his filing with the Virgin Islands Bureau of Internal Revenue (“VIBIR”) is somehow treated as a filing with the IRS then respondent wants to make it clear that the ASED did not expire before the notice of deficiency was issued.

Pursuant to Rule 41(a) a party can amend a pleading only by leave of Court or by written consent of the adverse party, and leave shall be given freely when justice so requires. The Court looks to the underlying circumstances including whether there is a reason for the delay and whether the opposing party would be harmed if the motion to amend was granted.

Here the Court looks to petitioner’s statements and its recent decision in Coffey and finds that respondent’s delay in seeking to amend his answer is understandable. Petitioner’s counsel also concedes that since the case has not been set for trial, allowing respondent to amend his answer will not prejudice petitioner so the Court grants respondent’s motion.

A New Flavor of Chai

Docket Nos: 14619-10, 14687-10, 7527-12, 9921-12, 9922-12, 9977-12, 30196-14, 31483-15, Ernest S. Ryder & Associates, Inc., APLC, et al. v. C.I.R. (Order here) 

“This species [of Chai ghoul] involves documentation that we have not seen the Commissioner offer in any other case,” states Judge Holmes in this designated order. I wrote on this case in my April 5, 2018 designated order post and another designated order for this case (which I did not write about) was issued during my last “on” week, but this order deserves some attention.

The cases were tried in two special trial sessions in 2016 and involve all sorts of taxpayers: C Corporations, a TEFRA partnership, and individuals. In all but two of the cases, the IRS asserted accuracy-related and/or fraud penalties.

The parties are now in the briefing process, but respondent has moved for the Court to reopen the record to allow in evidence that shows compliance with section 6751(b)(1) for some of the penalties. Petitioners object to this motion.

The motion is only for penalties asserted against the Ryders individually because respondent’s position is that he doesn’t have the burden to show compliance with section 6751(b)(1) for penalties asserted against a C Corporations and TEFRA partnerships.

The Court outlines the timeline in which that IRS proposed deficiencies and accuracy-related penalties in three separate deficiency notices issued to the Ryders for tax years 2002-2010. The IRS did not propose any section 6663 fraud penalties in any of the deficiency notices but raised the fraud penalties for all years in amended answers on March 21, 2016.

At trial in July and August of 2016, no evidence was raised as to respondent’s compliance with section 6751(b)(1) for the accuracy-related or fraud penalties and the parties did not stipulate to compliance. Then came Graev II and Chai and respondent still did not mention compliance with section 6751(b)(1) in his opening seriatim brief nor amended opening seriatim brief. Then the Court adopted Chai as its own in Graev III.

Due to the complexity of the cases and respondent’s very long opening brief, the Court granted petitioners more time to file their answering brief on three separate occasions, and during this time, the respondent moved to reopen the record.

The Court ponders whether it should reopen the record to admit respondent’s evidence against petitioner’s objection. Petitioner argues that respondent cannot use ignorance of the law as a defense and respondent was aware that section 6751(b)(1) would be an issue, so failure to introduce evidence beforehand shows a lack of diligence. Petitioners also argue that reopening the record would cause them prejudice because do not have a chance to cross-examine the IRS employees who made declarations about the evidence respondent now seeks to admit.

The decision to reopen the record is within the Court’s discretion, but that discretion is not limitless, so the Court evaluates each item.

First is an examination case processing sheet. Respondent has sought to admit penalty approval forms in other post-Graev III cases, and some have been admitted under the business records exception or as a verbal act to show a supervisor approved the penalty (and specifically not used to determine whether the penalty was justified or what the supervisor was thinking when it was approved). The Court does not think the business record or verbal-act analysis applies to the examination case processing sheet because the document itself does not indicate that a supervisor approved the initial determination of penalties. The case processing sheet needs an accompanying declaration from revenue agent, Ms. Phan, (which respondent also seeks to admit, but the Court finds is inadmissible hearsay) to make sense of it.

Second is several documents that allegedly support the section 6663 fraud penalty, the documents consists of: an email with an attached amendment to answer raising fraud, a redacted Significant Case Report, a 2016 employee evaluation, and a declaration from a different IRS employee explaining the significance of these documents.

The Court finds these documents are also inadmissible because they mean nothing without an explanation, and again, finds the IRS employee’s declaration to be inadmissible hearsay.

The Court declines to evaluate whether respondent was diligent or whether admitting the evidence would prejudice the petitioners because it finds that IRS has not shown that admitting this evidence would change the outcome of the case and denies respondent’s amended motion to reopen the record.

Technology Helps the Court

Docket No. 27759-15, George E. Joseph v. C.I.R. (Order here)

The Court has been slow to adopt technological advances and highlights the helpfulness of petitioner providing the cutting-edge technology (sarcasm intended) of a thumb drive containing his brief and exhibits in this designated order.

Petitioner filed a seriatim brief with the Court along with five files containing exhibits, but also mailed the Court a thumb drive containing an electronic version of his brief with hyperlinks to the exhibit files. The Court finds the thumb drive and hyperlinks to be helpful to all involved, but respondent has some objections. Some of the exhibits on the thumb drive are not in the record of the case and other exhibits (which are in the record of the case) contain notations that are not on the original exhibits.

The Court allows petitioner leave to file an amended brief without exhibits and provide a thumb drive with the exhibits that were actually received into evidence. It orders, among other things, that the files not received into evidence be deemed stricken from the case and that the thumb drive be returned to petitioner.

 

Designated Orders the Week of July 30 – August 3

Samantha Galvin from University of Denver’s Sturm Law School brings us this week’s designated orders. We congratulate Professor Galvin on her recent promotion to associate professor (and congratulate the law school on its wise decision.)  The first order she discusses concerns a somewhat unusual taxpayer. We thank Bob Kamman for bringing the back story to our attention. If the case goes to trial and the taxpayer does not change his arguments, he may face additional penalties for taking a groundless position that needlessly burdens the Court even if it is entertaining.  Professor Galvin points you to additional information if you find his story entertaining. Keith

There were a good number of designated orders the week of July 30, most were unremarkable, but for those interested they can be found: here, here, here, here, here and here.

And of course, Chai/Graev was back but in a slightly different context this time being used as a defense to penalties in a case where (consolidated) petitioners do not want the record to be reopened. The order (here) includes an analysis of the penalty rules applicable to C Corporations, individuals and a TEFRA partnerships.

But on to the orders I found most interesting…

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Credit for Creativity

Patrick Combs v. C.I.R., Docket No: 22748-14 (Order here)

My lecture on the assignment of income doctrine typically begins with me stating that it’s an antiquated concern that is rarely at issue in today’s electronic, information reporting world. Aside from genuine identity theft cases, it’s difficult for taxpayers to argue that someone else should pay tax on income earned by them and reported to the IRS in their name – so I was delighted to see this order be designated during the week of July 30.

Before getting into the details of the order, this petitioner’s background is worth mentioning. He is a monologist whose most famous work to date is a show called “Man 1, Bank 0” which details his successful attempt at cashing a non-negotiable, fake advertisement check for nearly $100,000 and the aftermath that followed when the bank realized its error. It’s worth a Google search.

Unlike writing him off as just another tax protestor, I can’t ignore the fact that his arguments (which are almost performance-like) in Tax Court may evolve into yet another successful comedy show.

So why is he in Tax Court? Petitioner failed to report income he earned as a monologist and from rental real estate that he owned in San Diego. At the time of this order, the Court had provided petitioner with many opportunities to reach a settlement and went as far as issuing a preclusion order, which barred petitioner from introducing at trial any records he failed to disclose to the IRS by a December deadline.

Petitioner met this deadline and the documents he provided included a written statement on the theory (or the “epiphany”) of his case. His theory involves another taxpayer, Mr. Holcomb (“Mr. H.”) and while the exact nature of their relationship is not disclosed, petitioner states that he is a penniless artist entirely dependent on Mr. H. to whom he has signed over (either via trust or agency agreements) all his income and property.

As a result, petitioner does not understand how he could be liable for any tax because if there are any taxes due they are due strictly from Mr. H. and the Court should address the issue with Mr. H.

Even if the Court had a reason to address anything with Mr. H, it would be difficult to do so. Mr. H. has his own interesting background and was recently found guilty by a jury of four counts of making a false statement to a financial institution.

Petitioner’s argument that he has no rights to the income becomes contradictory when he also writes that he is authorized by Mr. H. to spend the “signed over” funds for petitioner’s personal purposes in whatever way petitioner sees fit. This arrangement, petitioner states, “goes to the heart of why I chose to be one of [Mr. H.’s] fiduciaries in the first place. I am an artist (monologist) and there is no better space for an artist to be in other than one that frees him of all concerns relative to financial liability (income tax included), while at the same time being able to properly provide for himself and his family members.” Petitioner concludes his impassioned written statement with, “in simple straight forward speak; I am a “kept” man.”

The “trust arrangement” that petitioner has with Mr. H. calls Mr. H. the “director” of petitioner’s future income and property, and in return, Mr. H. agrees petitioner is the “manager” or “general manager” of such income and property and is free to do whatever petitioner wants to do with it.

The Court calls it an anticipatory assignment of income and warns petitioner that a 6673 penalty may be in his future if he continues with his theory.

The Court grants summary judgment in part for petitioner’s failure to report income, orders the parties to submit settlement documents with respect to other issues and if no settlement is reached expects the parties to appear at trial – where I’d expect there to be an inspired performance by petitioner.

Quash a Lot

Mufram Enterprises LLC, Wendell Murphy, Jr, Tax Matters Partner, et al. v. C.I.R., Docket Nos: 8039-16, 14536-16, 14541-16 (Order here)

Next before the Court is petitioners (in a consolidated docket) motion to quash two subpoenas duces tecum, which the Court grants in part.

The case involves a property appraiser that petitioners retained as a consulting expert, and specifically not as an expert witness, to assist them in preparing their case. Before the case commenced, the appraiser had also been hired by prospective lenders to appraise the properties involved in the case.

Respondent had requested appraisals of the properties from petitioners, but petitioners said appraisals did not exist.

Respondent issued a subpoena to the appraiser requesting documents beginning when he had become petitioners’ consulting expert. Without looking at the details of the subpoena, the appraiser stated aloud that he was not surprised by the subpoena because he had done appraisals of the properties.

This prompted IRS to issue another subpoena to the appraiser for records and correspondence from the last 23 years. The subpoena also requests that the appraiser testify at trial about facts, but not as an expert witness.

Petitioner argues the first subpoena should be quashed because the documents beginning at the time the appraiser became a consulting expert are protected work product, and the Court grants this motion to quash.

Regarding the second subpoena, petitioner argues that requiring the appraiser to produce records or correspondence that pre-date 2010 (the year of the first property appraisal related to this case) is unreasonable and oppressive. The Court agrees and limits the scope of the subpoena to the appraiser’s non-work product records and correspondence beginning in 2010.

With respect with whether the appraiser will need to testify at trial, the Court will hold judgement on the matter until trial, but if IRS intends to call the appraiser it will determine whether it is as a fact or expert witness, rule on the propriety of his being called, and then determine what fee amount (either the regular or expert witness fee) the IRS should pay to him.

Motion to Compel and Section 6103

Loys Vallee v. C.I.R., Docket No: 13513-16W (Order here)

Here is another whistleblower case where the IRS is arguing that petitioner’s submission did not lead to the collection of any tax, but in this case, the administrative record does not clearly demonstrate that.

Petitioner filed motion to compel production of documents and respondent filed a motion for summary judgment.

In opposition to respondent’s motion, petitioner is (as construed by the Court) challenging the sufficiency of the administrative record. Pursuant to Kasper v. Commissioner, 150 T.C. No. 2, the Court limits the scope of its review in whistleblower cases to the administrative record, but the administrative record can be supplemented if it is incomplete or when an agency action is not adequately explained in the record.

Respondent’s position is that the returns were already selected for exam at time petitioner’s information was received as supported by declaration from IRS employees, however, the administrative record does not contain the declarations that respondent relies upon. It also appears that employees beyond the ones identified by respondent were involved in reviewing petitioner’s submission.

Petitioner’s motion to compel is broad and requests information about all of the target taxpayers in his whistleblower submission (referred to a Corporate D, Related A and Related B by the Court). There are section 6103 disclosure concerns that come with petitioner’s motion to compel. Section 6103 generally prohibits disclosure of returns or return information, but there is an exception under 6103(h)(4)(B) that return information can be disclosed in a judicial proceeding pertaining to tax administration if treatment of an item reflected on a return is directly related to resolution of an issue in the proceeding.

Without ruling on petitioner’s motion (holding it in abeyance), the Court orders respondent to file petitioner’s Form 211 (the whistleblower application) and its attachments with the Court to enable it to review petitioner’s claims. It also orders respondent to respond to petitioner’s challenge to the sufficiency of the administrative record, and denies respondent’s motion for summary judgment.

 

Designated Orders 7/2/2018 – 7/6/2018

Samantha Galvin from University of Denver’s Sturm Law School brings us this week’s designated orders. The first two orders she discusses demonstrate the difficulty pro se taxpayers have in determining when to appeal an adverse decision while the third order is a detailed opinion regarding the factors necessary to obtain a whistleblower award. The whistleblower case reminds us that many dispositive orders have the same amount of analysis as many opinions but when issued as an order lack any precedent and generally fly under the radar of those looking for Tax Court opinions. Keith

The week of July 2nd started off light but ended with a decent amount of designated orders – three are discussed below. The six orders not discussed involved the Court granting: 1) a petitioner’s motion to compel the production of documents under seal (here); 2) respondent’s motion for summary judgment when a petitioner did not respond nor show up at trial (here); 3) respondent’s recharacterized Motion to File Reply to Opposition to Motion for Summary Judgment (here); 4) respondent’s motion for summary judgment on a petitioner’s CDP case for periods that were already before the Tax Court and Court of Appeals (here); 5) respondent’s motion for summary judgment in CDP case where petitioners’ did not provide financial information (here); and 6) an order correcting the Judge’s name on a previously filed order to dismiss (here).

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Ring the Final (Tax Court) Bell on Bell

Docket No. 1973-10L, Doug Stauffer Bell and Nancy Clark Bell v. CIR (Order here)

This first order is for a case that William Schmidt blogged about (here). Bob Kamman also followed up on this case, in the comments to William’s post, with useful background information that sheds light on the petitioners’ circumstances. In the last designated order, the Court had ordered petitioners to show cause as to why the Court should not dismiss their case for failure to prosecute no later than June 28. Petitioners did not respond to the order to show cause, so the Court has dismissed the case.

If you recall the petitioners filed for bankruptcy three separate times while their Tax Court case was pending but ultimately failed to complete the bankruptcy process each time. Then they prematurely appealed to the Fourth Circuit, which dismissed their case for lack of jurisdiction after finding that the IRS appeals’ determination (issued after remand by the Court) was not “a final order nor an appealable interlocutory or collateral order.”

Now that the Court has dismissed their case it becomes appealable, however, the petitioners’ lack of meaningful participation in the process up to this point unfortunately does not bode well for an appeal.

The next order I discuss also involves a premature attempt to appeal a not-yet-final Tax Court decision.

Appeal after Computations

Docket No. 12871-17, Duncan Bass v. CIR (Order here)

This case is pending under rule 155 and it is somewhat understandable why petitioner thought the decision was final. Petitioner was served a bench opinion on June 8, 2018, and subsequently appealed to the Fifth Circuit, however, the bench opinion was an interlocutory order and the Court withheld entry of its decision for the purposes of permitting parties to submit computations, as rule 155(a) allows.

Interlocutory orders are generally not appealable, but there is an exception for “orders that include a statement that a controlling question of law is involved with respect to which there is a substantial ground for differences of opinion” and “an immediate appeal from that order may materially advance the ultimate termination of the litigation.” The order in this case does not contain such a statement. As a result, the Court orders the parties to continue to comply with rule 155 to resolve the computational issues so that the Court may enter a final, and thus appealable, decision.

A Disappointed “Whistleblower”

Docket No. 8179-17W, Robert J. Rufus v. CIR (Order here)

The petitioner in this case is an accountant who was hired to help prepare a statement of marital assets as part of a divorce proceeding, which gave him access to his client’s soon-to-be ex-husband’s (“the ex-husband’s”) tax information. This information led petitioner to believe that the ex-husband had underreported gifts and treated gifts as worthless debts. He provided information about these two violations in an initial and supplemented submission to the Whistleblower Office, which ultimately denied him an award.

In this designated order, respondent moves for summary judgment on petitioner’s challenge of the denial of the award. Respondent argues that it did not abuse its discretion in denying the award because, although the ex-husband was audited and tax was assessed, the IRS did not rely on the information petitioner provided.

Regarding petitioner’s initial submission, the IRS examined the ex-husband’s underreporting of gifts but found that there was not enough independent, verifiable data to support a gift tax assessment. The ex-husband had also filed amended returns which included worthless debts of $23 million and generated losses which he carried back and forward in amended 2003, 2004, and 2006 returns. Petitioner was aware of these amended returns and provided the IRS with information about the worthless debts in a supplemented submission, alleging that the debts were actually gifts to family and friends. According to respondent, the large refund amounts claimed on the returns are what triggered the audit, rather than petitioner’s information.

The information petitioner sent was never seen or used until after the case was closed because the assigned revenue agent believed, for unexplained reasons, that the information was based on grand jury testimony and was tainted. In the audit, the revenue agent concluded the ex-husband failed to substantiate the bad debts he claimed and assessed tax accordingly.

The Whistleblower office sent petitioner a letter denying his claim regarding the gift tax liabilities to which petitioner responded stating that his claim involved the gift tax liabilities and the treatment of gifts as worthless debts. The Whistleblower Office then sent a final determination reviewing each item, and with respect to the worthless debt the IRS stated that it had identified the issue prior to receiving information from petitioner.

Petitioner petitioned Tax Court on that final determination arguing that the exam was initiated due to his information and the information was directly, and indirectly, beneficial to the IRS and resulted in the assessment of tax, penalties, and interest but he offered no evidence to support these claims. He also argued that respondent was too focused on the timing of his supplemented submission in an attempt to deny the award.

A whistleblower is entitled to an award if the secretary proceeds with any administrative or judicial action based on information submitted by the whistleblower. Additionally, the award is only available if the whistleblower’s target’s gross income exceeds $200,000, and if the amount or proceeds in dispute exceed $2,000,000. The IRS must take action and collect proceeds in order to entitle the whistleblower to an award. If the IRS’s action causes the whistleblower’s target to file an amended return, then the amounts collected based on the amended return are considered collected proceeds.

Since the petitioner in this case did not provide additional evidence, the Court reviews the administrative record which reflects that petitioner’s first submission was related to the gift tax issue, on which no proceeds were collected. The administrative record also reflects that petitioner’s supplemented submission about the worthless debts was not used in the exam of the amended returns and the revenue agent received the information after the returns were already selected for exam. Based on its review of the administrative record, the Court grants respondent’s motion for summary judgment.

 

Designated Orders June 4 – June 8, 2018

Professor Samantha Galvin from the University of Denver Strum School of Law brings us the designated orders this week. The orders she discusses contain a lot of meat. Very little has been written administratively or by courts on Section 179D but it pops up in a designated order. The other two orders concern some common issues but in slightly uncommon settings. Keith

There were eight orders designated during the week of June 4, 2018. Three are discussed below and the most interesting of the orders not discussed (here) involves taxpayers who requested that the IRS levy their retirement account in order to satisfy their tax liability and avoid the 10% early withdrawal penalty. Keith blogged about this case (here) and will be posting an update soon.

The other orders not discussed involved: 1) an order that petitioner respond to motions to dismiss and entry of decision because he signed decision documents, but included a concession qualification (here); 2) a dismissal and decision when petitioner did not satisfy pleading requirements (here); and 3) two schedule C/business expense bench opinions (here) and (here).

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A Designer and Section 179D

Docket No. 12466-16, The Cannon Corporation and Subsidiaries v. C.I.R. (Order here)

At issue in this order is Section 179D and the potential confusion caused by the IRS’s failure to promulgate regulations. When a building owner installs energy-efficient systems or property into a commercial building, section 179D allows the owner a deduction equal to the cost of the property placed in service during the taxable year and requires the owner to reduce the property’s basis by the amount of the deduction.

If the owner is a Federal, state or local government who cannot benefit from the deduction, section 179D(d)(4) states that the Secretary shall promulgate regulations that allow designers, rather than owners, to take the deduction.

The Secretary did not promulgate any regulations, even though the law was passed 13 years ago. The IRS did, however, issue Notice 2008-40 which describes the way in which owners should allocate their deductions to designers and Revenue Procedure 2011-14 (discussed below).

Petitioner, a corporation, designs energy-efficient buildings around the world, including for federal, state, and local governments. It did not take the deductions to which it would have been entitled for 2006-2010. Its 2006 return was amended timely after the Notice 2008-40 was issued and petitioner received the deduction for that year, so it is not at issue.

For 2007-2010, however, petitioner claimed the deductions for those years and for 2011, on its 2011 tax return as “other deductions” and identified the earlier year deductions as section 481(a) adjustments required by a change in method of accounting. The IRS disallows the 2007-2010 deductions stating that an accounting method change is not the appropriate way to claim the deductions for prior years.

Respondent argues that section 481(a) adjustments are reserved for accounting method changes and section 179D is a permanent, rather than temporary, change. Petitioner disagrees and references Rev. Proc. 2011-14 in support of its position. To petitioner’s credit (and the Court acknowledges that it understands how petitioner could be confused) the revenue procedure is titled, “Changes in accounting periods and methods of accounting” and contains a section on 179D titled, “Elective Expensing Provisions” which describes the steps a taxpayer should take to change his method of accounting and claim a 179D deduction.

What petitioner fails to recognize is that the deduction is still only allowed for the tax year during which the property is place in service, which is stated in the code section and the revenue procedure. Some of the property petitioner wishes to take the deduction for was placed in service in 2007-2010, and not 2011. The Court looks to the regulations under section 481 which allow an accounting method change only if the change accelerates deductions or postpones income, and not if it permanently distort a taxpayer’s lifetime taxable income.

The deduction could be an accounting method change for an owner because it allows an owner to accelerate deductions that he would otherwise be entitled to take as depreciation deductions. That acceleration would not permanently distort the owner’s lifetime taxable income since the deduction also reduces an owner’s basis in the property and the owner would recognize income when he disposed of the property.

Petitioner is not an owner and the Court finds that allowing petitioner a section 179D deduction in 2011 for years 2007-2010 would permanently distort its lifetime taxable income. Petitioner would not otherwise be able to deduct the same amount under different circumstances, nor would it have to recognize the income later in an amount equal to the deduction.

The Court allows petitioner to file a supplement to its opposition to respondent’s first amended motion for partial summary judgment regarding other issues in the case, and grants respondent’s amended motion for partial summary judgment on this issue.

Unreimbursed Employee Expenses: A Suspended Concern

Docket No. 22482-17, Raykisha Morrison v. C.I.R. (Order here)

This designated order is a bench opinion for a case involving unreimbursed employee expenses. These types of deductions are commonly at issue for unrepresented taxpayers that we see at calendar call. There often seems to be confusion as to what type of expenses qualify for the deduction, and issues arise when an employer has a reimbursement policy that the taxpayer chooses not to use. On top of that, taxpayers often lack the proper substantiation.

The petitioner in this case is an occupational safety and health specialist and her work involves traveling to airports. Her company’s policy reimburses the cost of a rental car or the use of her own vehicle, but she is unable to prove the extent to which she was not reimbursed. She did not present a mileage log and instead presented bank statements totaling her vehicle-expenses. The amount on the bank statements far exceeded the amount she deducted on her return, with no reasonable explanation as how she determined the smaller number, so the Court disallows her vehicle expense deductions.

The Court does allow a portion of petitioner’s home office expense deduction. Petitioner had initially deducted 100% of her rent and utilities, but the Court limits it to 20% since that is the percentage of her apartment that was exclusively used for business purposes.

The Tax Cuts and Jobs Act suspends miscellaneous itemized deductions, which include unreimbursed employee expenses, until 2026. While this will result in few taxpayers getting into trouble with these issues, it may also create a hardship for taxpayers who are genuinely entitled to deductions.

A Focus on Frivolousness

Docket No. 18254-17, Gwendolyn L. Kestin v. C.I.R. (Order here)

I previously discussed this petitioner’s case in my post last month (here). Petitioner’s case involves a frivolous amended tax return which resulted in the assessment of seven section 6702 penalties. The Court granted respondent’s motion for summary judgment, in part, in the last designated order.

The case was set for trial on the remaining issues, and the principal question was whether sending copies of an already filed, amended return along with correspondence about the return is a “filing” under 6702 on which the IRS could impose additional penalties. Petitioner did not appear at the trial and instead filed motions which focus on frivolous arguments instead of addressing the real question.

This current order came about after the Court received a motion from petitioner with a title that suggests she does not understand the posture of her case. Her motion is titled, “Motion to Set Aside Dismissal with Motion to Vacate for Lack of Subject Matter Jurisdiction and Procedural Rule Violations and Judicial Canon Violations.” The case has not been dismissed so there is no dismissal to set aside, and a decision has not yet been entered so there is no decision to vacate. The Court recharacterizes her motion as a motion for reconsideration, denies it, and warns her that she risks a separate penalty under section 6673(a).

Previously, petitioner had also filed a motion to dismiss her case for lack of jurisdiction and the Court denied that motion because she was mistaken about the Court’s jurisdiction. At trial, even though petitioner did not appear, respondent put on its case since it had the burden of production under 7491(c) and burden of proof under 6703(a).

The Court ordered post-trial briefs and asks petitioner in this order to use her post-trial brief to explain her position on whether the IRS is correct to impose more than one section 6702(a) penalty, rather than continue to make frivolous arguments. Petitioner can potentially save herself from owing more than one penalty, including the Court’s section 6673(a) penalty, if she can focus her energy on the real issue at hand.

 

 

Designated Orders 5-7-18 to 5-11-18

We welcome Professor Samatha Galvin from Denver Law School for her turn at discussing the designated orders. She discusses the obligatory 6751 cases towards the end of the post after opening with a discussion of a post concerning the attempt by a taxpayer to get some credit for refunds lost to the statute of limitations. For an excellent discussion of the contrasting application of 6751 by the Tax Court at this point, see the recent post by Professor Bryan Camp over on the TaxProf blog. 

While the taxpayer in the case discussed below by Professor Galvin does not get credit for her lost refunds in the context discussed below (and I expect will almost never get credit in a court case), Dale Kensinger who volunteers with my clinic, did recently have some success with this argument in an ETA offer in compromise. It is hard to say whether Dale just had a very sympathetic offer examiner or if the resolution reflects a general policy but Dale’s arguments that the taxpayer should get some finger on the scale in the ETA context for lost refunds, which refunds would have fully satisfied the outstanding liability, resulted in an offer acceptance with less than full payment.

We are behind in our designated order posts and will publish two today in order to catch up.  Keith

For anyone considering the creation of a low income taxpayer clinic, we offer the following public service announcement:

The IRS has announced the application period for Low Income Taxpayer Clinic (LITC) grants for calendar year 2019 is now open and will run through June 27, 2018. A listing of the 2018 LITC grant recipients is available on IRS.gov

The mission of LITCs is to ensure the fairness and integrity of the tax system for taxpayers who are low income or speak English as a second language:

  • By providing pro bono representation on their behalf in tax disputes with the IRS;
  • By educating them about their rights and responsibilities as taxpayers; and
  • By identifying and advocating for issues that impact low income taxpayers.

The IRS welcomes all applications and will ensure that each application receives full consideration. The IRS is committed to achieving maximum access to representation for low income taxpayers under the terms of the LITC program. Thus, in awarding LITC grants for calendar year 2019, the IRS will continue to work toward the following program goals:

  • Obtaining coverage for the states of Hawaii, North Dakota, and the territory of Puerto Rico to ensure that each state (plus the District of Columbia and Puerto Rico) has at least one clinic;
  • Expanding coverage to counties in the following areas that are currently not being served by an LITC:  mid-Florida, northeast Arizona, northern Pennsylvania, and southeast New York (not including boroughs of New York City); and
  • Ensuring that grant recipients demonstrate they are serving geographic areas that have sizable populations eligible for and requiring LITC services.

The complete program requirements and application instructions can be found in Publication 3319 on www.irs.gov.

There were five designated orders the week of May 7, 2018 and four are discussed below. The only order not discussed ruled on the admittance of probative exhibits in an S case (here).

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Ignorance is Costly

Docket No. 23103-17S L, Bernadine Mary Hansen & Robert Joseph Hansen v. C.I.R. (Order here)

Prospective clients occasionally come to our clinic with the mistaken belief that their old, unclaimed refunds should offset any future tax that they owe. Unfortunately, that is not the way the refund statute works and there is no room for negotiating a “call it even” arrangement with the government in this context. The petitioners in this case were a bit more reasonable and only requested that their current penalties be abated because they did not claim old refunds.

The designated order grants respondent’s motion for summary judgment after the petitioners failed to respond, but the Court goes on to evaluate the arguments made by petitioners in their Form 12153 and related correspondence.

The form and correspondence state that petitioners do not think they should be responsible for penalties, because it was their understanding that if they were due refunds they could file a return at any time. They acknowledge that it would not have been possible for the IRS to know that they were due refunds, but they assumed that since they had consistently overpaid their tax liability in the past the trend would continue indefinitely.

Petitioners go on to compare the refunds they would have had of $24,194.44 to the amount they owe of $6,541.58 – and argue that because the IRS has “kept” $17,652 of their refund money they should not be penalized for their failure to file and failure to pay for the years in which there is a balance due. They also state that they still hope to receive some of the foregone refund money.

Additionally, petitioners represented to their settlement officer that a revenue officer had agreed to abate the failure to file and failure to pay penalties for 2008 and 2009, however, the settlement officer determined that only the 2009 abatement had processed because only one tax period (typically, the earliest period) can be eligible for first time abatement.

Ignorance of the law is not a reasonable cause defense, so the Court does not abate petitioners’ penalties and sustains the proposed levy.

No Judicial Notice

Docket No. 4901-16, 130 Ionia, LLC, Andrew T. Winkel Trust U/A/D January 30, 2008, Tax Matters Partner v. C.I.R. (Order here)

This order addresses a dispute over a conservation easement deduction. Respondent argues that the property subject to the deduction is not a historical building or structure listed in the National Register as required by section 170(h)(4)(C)(i). Whereas petitioner argues that the building is listed in the National Register. Despite their contradictory assertions, neither respondent nor petitioner submit evidence that could answer the question of whether the property is listed in the National Register.

The Court does not find the answer simple enough to take judicial notice of it and suggests that an expert opinion may be necessary, so it denies respondent’s motion for summary judgment because the case still involves a genuine dispute between parties as to a material fact.

Recent Section 6751(b)(1) News

Two of the week’s designated orders involve section 6751(b)(1) which has been covered substantially in other posts, so rather than go into too many details I briefly highlight the issues here.

1) Docket No. 20412-14, Triumph Mixed Use Investments III, LLC, Fox Ridge Investments, LLC, Tax Matters Partner v. C.I.R. (Order here)

Respondent moves to reopen the record to address the supervisory approval requirement of section 6751(b) in a notice of final partnership administrative adjustment (FPAA) case after the Court allowed the parties to file motions addressing the application of section 6751(b) in the aftermath of Graev III.

Even though respondent moves to reopen the case, he also argues that he does not bear the burden of production with respect to the penalties in the proceeding because of the decision in Dynamo v. Commissioner. In Dynamo, the Tax Court held that the IRS does not bear the burden of production in a partnership-level proceeding, because it is not a proceeding with respect to the liability of an individual as section 7491(c) requires.

The Court states there is no need to reopen the record to permit the Commissioner to meet a burden that does not fall on him. Additionally, petitioner has not raised the issue of whether there was supervisory approval, so the case need not be reopened since doing so would not affect its outcome. As a result, the Court denies respondent’s motion to reopen the record.

2) Docket No. 18254-17 L, Gwendolyn L. Kestin v. C.I.R. (Order here)

This designated order involves section 6751(b)(1) as it relates to section 6702. This case is very similar to case highlighted in recent posts by Patrick Thomas here and Keith here.

The taxpayer and her husband submitted what appeared to be a normal 2014 tax return reflecting wages and a tax liability. Subsequently, the taxpayers amended the return reporting zero tax liability and a statement of the tax protestor variety.

The IRS responds by sending a Letter 3176C advising the taxpayers that the position reflected on their return is frivolous and they intend to assert a $5,000 penalty under section 6702 as a result. The IRS ultimately asserts seven section 6702 penalties for a total of $35,000. Although this is a CDP case, petitioner has not had the prior opportunity to challenge the underlying assessment and the Court cannot determine if petitioner should be liable for more than one penalty. It appears that most of the penalties were assessed on copies of the amended return that were sent along with correspondence from petitioner about the amended return, so the Court asks whether a copy constitutes a filing as required by section 6702.

The Court also want to ensure that the IRS complied with supervisory approval requirements of section 6751(b)(1). The approval is shown by the obscured and illegible signatures of a manager, but the Court does not know if that person was the immediate supervisor of the originator of the form as required by 6751(b)(1). The Court grants respondent’s motion for summary judgment in part (finding the amended return was frivolous) and denies it in part allowing the case to continue to trial.

 

Designated Orders the Week of 4/9 – 4/13

We are catching up on some past designated orders. This week Samantha Galvin from University of Denver brings us up to date on the designated orders from last month; the first matter, Joseph v Commissioner, highlights how in most deficiency cases the Tax Court takes little interest in the substance or workings of matters at Appeals; the second sweeps in issues relating to returns with frivolous positions. Les

The week of April 9th was, unfortunately, not the most exciting week for designated orders. The Tax Court designated six orders, and three are discussed below with two of the three pertaining to the same case. The orders not discussed are: 1) an order granting respondent’s motion to withdraw admissions (here), 2) an order in a consolidated case reopening the record and allowing petitioner to serve respondent with interrogatories in a substantiation case with a Graev IIIaspect (here), and 3) an order and decision granting respondent’s motion for summary judgment and sustaining a notice of determination when petitioners did not provide an installment agreement amount (here).

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Appeals Officer’s Testimony Excluded

Docket No. 27759-15, George E. Joseph v. C.I.R. (Order here and here)Judge Halpern designated two different orders in this case during the same week, which is somewhat unusual. Both orders involve the same issue which is whether the testimony of IRS Appeals Officer Nancy Driver is admissible.

The first order addresses respondent’s oral motion to exclude Ms. Driver’s testimony. Respondent’s motion was made during a conference call with the parties in advance of their trial. Petitioner requested the conference call to discuss whether Ms. Driver will be available to testify. Ms. Driver is the Appeals Officer who first considered petitioner’s case after he petitioned the Court.

Petitioner argues that Ms. Driver’s testimony is relevant because she identified problems with the IRS’s initial examination of his return. Respondent argues Ms. Driver testimony is not relevant and the Court should exclude her as a witness under Federal Rules of Evidence (“Fed. R. Evid.”) 104, which states the Court “must decide any preliminary question about whether a witness is qualified, a privilege exists, or evidence is admissible.”Respondent argues Ms. Driver’s testimony is excludible under Fed. R. Evid. 408 because it is evidence of a compromise of the deficiency determined by respondent.

The Court also brings the parties attention to Greenberg’s Express Inc. v. Commissioner, 62 T.C. 324 (1974) which states that “[a]s a general rule, this Court will not look behind a deficiency notice to examine the evidence used or the propriety of respondent’s motives or of the administrative policy or procedure involving in making his determinations.” The rationale behind this is that “a trial before the Tax Court is a proceeding de novo; [the] determination as to a petitioner’s tax liability must be based on the merits of the case and not any previous record developed at the administrative level.” Greenberg’s Expressat 328.

The Court does not understand what Ms. Driver’s testimony could include, other than matters precluded by Fed. R. Evid. 408.

Petitioner argues that respondent’s deficiency determination is wrong and that the amounts on the return were correct. Petitioner also alleges that the auditor assigned to his case pulled numbers “out of the air.” Despite these allegations, the Court states that petitioner fails to clearly and concisely state the facts on which petitioner bases errors as Tax Court Rule 34 requires.

The Court asks petitioner to be clear and concise, put forward any objections to Rule 408, and to respond to concerns about the relevance of Ms. Driver’s testimony and the application of Greenberg’s Express.

The second order in this case grants respondent’s motion to exclude the testimony of Ms. Driver.

It appears to the Court that Ms. Driver thought some of the adjustments were less than what respondent had determined. Rather than agree to a settlement with Ms. Driver, the petitioner continued through the process until his case was calendared for trial.

Petitioner states that, “Ms. Driver’s efforts demonstrated a true understanding of the issues presented in the taxpayer’s case” and the Court should consider Ms. Driver’s efforts as a starting point. Again, however, the Court finds petitioner fails to specify which facts he relies upon to show error and still does not identify what knowledge of the facts Ms. Driver possesses.

Ms. Driver’s role was to consider petitioner’s case and reach a resolution that would eliminate, or reduce, the issues for trial. Petitioner did not accept Ms. Driver’s findings when he had the opportunity to do so and the Court will not inquire into why that is. The Court concludes that Ms. Driver’s testimony is not admissible and grants respondent’s motion to exclude it.

Frivolity from the Start

Docket No. 11492-17L, Walter C. Lange v. C.I.R. (Order here). In this case, petitioner petitions the Court on a Notice of Determination proposing a levy of section 6702(a) penalties. Section 6702(a) applies when a return is filed with incorrect information and the IRS identifies it as a frivolous position, or the filing of an incorrect return “reflects a desire to delay or impede the administration of Federal tax laws.”

Respondent argues petitioner filed frivolous tax returns for 2007, 2009 and 2012. Petitioner moves for summary judgment which the Court denies, because it finds that petitioner’s arguments do not establish that there is no genuine dispute to any material facts and that a decision may be rendered as a matter of law.

Petitioner argues that respondent determined multiple penalties for the same tax year, but respondent concedes this issue. Respondent submits Forms 4340 showing the assessment of the penalties at issue to satisfy petitioner’s right under section 6203 to a copy of the record of assessment.

The Court finds petitioner’s remaining arguments, which it does not go into detail about, are meritless. The Court warns petitioner against advancing frivolous or groundless arguments at or after trial and against maintaining the proceeding primarily for purposes of delay. If petitioner does not heed the Court’s warning, it may impose a penalty of up to $25,000 under section 6673(a)(1).

Designated Orders for week of 3-12-2018

Guest blogger Samantha Galvin from University of Denver brings us up to date on the designated orders this week.  (We are a bit behind on publishing these but will catch up soon.)  I had the chance to see Samantha recently at the Tax Court Judicial Conference and to hear comments from many readers of this feature. As always in 2018 there are orders on issues concerning the Graev case. Michael Jackson’s estate continues to provide fodder as well. Perhaps the most interesting case is the first one she discusses. The issue of obtaining a refund in a CDP case is one we thought was settled with the answer being that it was not possible to obtain a refund in that forum. Perhaps the Tax Court has decided to revisit the area. See here and here for prior discussion of that issue. There is also a lengthy discussion of the issue in the Collection Due Process chapter of Saltzman and Book. Keith

The Tax Court designated seven orders the week of March 12, 2018. Three are discussed below, the orders not discussed are: 1) an order ruling on a motion for continuance and motion to dismiss involving the Court’s discretion to grant a continuance shortly before trial (here); 2) a ruling on evidentiary matters in the Michael Jackson Estate case (here); 3) an order involving partnership issues where petitioner filed a motion in limine and motion to dismiss for lack of jurisdiction (here); and 4) an order reopening the trial record in a case involving a Graev III analysis (here).

A Novel Jurisdictional Question – Can the Court Order Refund in a CDP Case?

Docket No. 20317-13, Brian H. McClane v. C.I.R. (Order here)

In this designated order the Tax Court directs the pro se petitioner to contact LITCs in the Baltimore area because it confronts a novel issue, which is whether the Court has jurisdiction to determine and order the credit or refund of an overpayment in a CDP case. The case is before the Court to review a determination sustaining an NFTL for tax years 2006 and 2008.

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It is important to note that the parties dispute whether respondent properly mailed a notice of deficiency (“NOD”) for the years at issue, but both parties agree that the petitioner did not receive a notice of deficiency.

During and after trial, respondent accepted petitioner’s substantiation of deductions for 2008 which results in petitioner’s tax liability being less than the amount reported on his return and eliminates the need for the Court to sustain the NFTL for that year. As a result, the Court asks if the parties object to a decision upholding respondent’s determination for 2006 only, and petitioner objects because he believes he is due a refund for 2008.

Petitioner did not claim a refund in his petition, but that does not preclude him from pursuing a refund claim now because Rule 41(b)(1) requires that any issues tried by express or implied consent are treated as if they were raised in the initial pleadings. The Court views respondent’s concessions as implied consent to the issue of whether petitioner is entitled to a refund. The fact that the issue is raised, however, does not establish the Court’s jurisdiction over the issue. This bring us to the focus of the designated order – does the Court have jurisdiction to order a refund here?

The Court requests that the parties submit supplemental briefs on this issue before the Court resolves it but provides guidance in the form of observations and questions.

Sections 6330(d)(1) and 6512(b)(1) are relevant to the issue of the Court’s jurisdiction to determine and order the refund or credit of an overpayment in a CDP case. Section 6330(d)(1) is the principal, and perhaps the only, basis for jurisdiction and allows the Court to review a determination made by Appeals. The authority is generally regarded as limited to matters within scope of Appeals’ determination. This permits the Court to decline to uphold the determination to sustain the NFTL for 2008, but can they go further and order a refund? Did Appeals have the authority to order a refund and does that matter?

The Court asks petitioner to advise the Court on whether he views the Court’s ability to order a refund within the jurisdiction of 6330(d)(1) and what analysis or authorities support that view. The Court similarly asks respondent to advise the Court on whether the Court’s jurisdiction is limited under section 6330(d)(1) and whether Appeals has the authority to order a refund.

Section 6512(b)(1) gives the Court jurisdiction to determine and order the refund or credit of an overpayment in deficiency cases, but this is not a deficiency case.

Section 6512(b)(3) limits the Court’s ability to order a credit or refund to only that portion of tax paid after the mailing of a NOD or the amount which a timely claim for refund was pending (or could have been filed) on the date of mailing of the NOD. Is this limitation a further indication that overpayment jurisdiction by section 6512(b)(1) is ancillary to deficiency jurisdiction under section 6214(a)?

Respondent’ efforts to collect a deficiency that petitioner did not previously have an opportunity to contest puts into play the amount of his tax liability for that year under section 6330(c)(2)(B), but it is not clear that respondent’s efforts had any effect on petitioner’s ability to pursue a refund claim in other ways (by filing an amended return or responding to the NOD). The Court is not aware of any reason why petitioner could not have pursued his refund claim independently of respondent’s collection action and the section 6330 petition.

Petitioner filed the return at issue in 2009 but made payments from 2009 and 2012 meaning that the latest he could have claimed a refund for some of the amount paid was 2014, so the Court wonders to what extent petitioner’s claim is timely. Did respondent’s issuance of NFTL or any other event that occurred as part of the CDP case suspend the section 6511(a) period of limitations? Or any action on part of petitioner? If respondent’s issuance of the NFTL did not affect petitioner’s ability to pursue a refund claim that has since become time-barred, then petitioner has no ground to complain about the Court’s inability to entertain a belated refund claim as part of the present case.

Supplemental briefs on the issue are due on or before April 30, 2018.

Simple, Concise and Direct

Docket No. 14619-10, 14687-10, 7527-12, 9921-12, 9922-12, 9977-12, 30196-14, 31483-15, Ernest S. Ryder & Associates, Inc., APLC, et al. v. C.I.R. (Order here)

This designated order is somewhat unique because it contains a lesson for Respondent.

These consolidated docket cases had been tried in two special sessions in 2016. During trial, Respondent made an oral motion to conform the pleadings to proof (which means that the Court treats the issues tried by the parties’ express or implied consent as if they were raised in the initial pleadings) pursuant to Rule 41(b) and the Court directs respondent to put his motion in writing so it can serve as an amended pleading. Rule 41(d) requires that amended pleadings to relate back to the original pleading.

The motion filed by respondent has two attachments (issues raised in the NOD and issues raised at trial) which contain over 100 different numbered items which are duplicative to some extent. Despite the voluminous nature of the attachments, respondent also states that the lists are not exhaustive. The Court finds deciphering the issues raised by respondent to be confusing and since the Court is confused, it understands that the petitioner may also be confused.

Petitioner argues that respondent’s evolving theories prejudice him by making it difficult to know which theories warrant a response. Rule 31(b) requires that pleadings be simple, concise and direct. The Court has discretion to allow amended pleadings but denies respondent’s motion because it violates Rule 31. The Court directs respondent to make his motion describe the issues more clearly if he plans to resubmit it.

Three Attorneys and Levy Still Sustained

Docket No. 26364-16, Patricia Guzik v. C.I.R. (Order here)

 

The petitioner is in Tax Court on a determination to sustain a levy on income tax and section 6672 trust fund recovery penalties. Respondent moves for summary judgment and argues that the settlement officer did not abuse her discretion since petitioner’s offer in compromise could not be processed due to an open examination and petitioner could not establish an installment agreement because she failed to propose a specific monthly payment amount. The Court grants respondent’s motion.

Petitioner is very sympathetic. She was diagnosed with Multiple Sclerosis, pregnant and on bed rest when she first began working with Appeals in her collection due process hearing. Her attorney, the first of three over 14 months, requests an extension to submit a collection statement and an offer in compromise, which the settlement officer grants. Because petitioner’s 2011 return was being audited, the settlement officer informed the attorney that an offer would not be processable unless the audit was closed by the time the offer was considered, but an installment agreement may be an option.

The first attorney faxes over a collection information statement and requests another extension to submit an offer in compromise which the settlement officer grants, but this deadline is ultimately missed.

Petitioner hires new representation in the meantime and the second attorney requests an extension which, again, the settlement office grants. This time the offer is submitted, but it is not processable due to the still open audit. While the offer is being considered, petitioner hires new representation for the third time. The newest attorney informs the settlement officer that because the offer is not processable, petitioner wants to propose an installment agreement. Petitioner’s counsel asks if the settlement officer has an amount in mind and the settlement officer states that proposing an amount is not her role, it is petitioner’s. The settlement officer also states that petitioner’s assets may need to be liquidated before the installment agreement can be considered. At this point, petitioner has not paid her 2015 liability and has not made estimated tax payments for 2016.

Petitioner pays nearly all her trust fund recovery penalties, which she argues is a material change in circumstances, and because of that change the Court should remand her case back to Appeals for review.

The Court can remand cases back to Appeals but typically does so if a taxpayer’s ability to repay has diminished and does not necessarily do so when a taxpayer’s ability to pay has improved – so the Court chooses not to remand the case.

Petitioner’s health issues are very unfortunate, but she had three attorneys in 14 months all of whom requested extensions which the settlement officer allowed. Even with the additional time, petitioner never submits an installment agreement proposal, so the Court sustains the levy finding that the settlement office did not abuse her discretion.

 

Designated Orders 2/12 – 2/16

This week Samantha Galvin, who teaches and assists in running the low income taxpayer clinic at University of Denver, brings us the designated order post. In addition to the designated orders, she talks about one “ordinary” order issued during her week. Regular readers are by now tired of the many posts on the, so far, failed attempts of the tax clinic at Harvard to convince the Tax Court or an appellate court that the time period to file a Tax Court petition is not jurisdictional and can be equitably tolled. For those who are new to reading the blog or who want to review this issue see a sample of posts here, here and here.

Samantha discusses the case of Khanna v. Commissioner in which the Tax Court flexed its equitable tolling muscles a bit and indicated that it may ask the IRS to comment on the jurisdictional nature of time for filing the CDP request. This could be an interesting case to watch for those following the issue of Tax Court jurisdiction and equitable tolling. The issue does not center on the timely filing of a petition in Tax Court but rather on the timely filing of a pre-requisite to Tax Court jurisdiction – the filing of the CDP request. Keith

There were ten orders designated during the week of February 12th. Three are discussed below, along with one non-designated order. The orders not discussed address: 1) a petitioner’s motion to dismiss (here) and motion for continuance (here); 2) respondent’s motion to submit a section 7428 case under Rule 122 (here); 3) a tax protestor (here); 4) a bench opinion involving section 195 expenses (here); 5) a bench opinion involving questionable business deductions (here); and 6) a request for retained jurisdiction which had been resolved in an earlier order (here).

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Secondary Business Purpose is not Sham

Docket No: 12772-09, Peking Investment Fund LLC, Peking Investment Holdings LLC, Tax Matters Partner v. C.I.R. (Order here) 

In this first designated order the Court denies respondent’s motion for partial summary judgment because there are disputed questions of material fact. The action was brought in response to a notice of final partnership administrative adjustment. The partnership was formed to collect on non-performing loans (NPLs), and without going into too much detail, some of the transactions were between foreign entities. Respondent seeks to disallow a $26 million loss and argues that the partnership should be disregarded as a sham, or alternatively, the basis in the received portfolio should be reduced, pursuant to sections 482 and 723, so that no loss is realized. Petitioners object to both arguments.

Respondent relies on Commissioner v. Culbertson, 337 U.S. 733 (1949) which requires that parties must “in good faith and acting with a business purpose” intend “to join together in the present conduct of the enterprise” to form a genuine partnership.

Respondent has three arguments for why petitioners do not have a business purpose, and thus, the partnership should be disregarded.

First, respondent argues that the partnership was formed to implement a tax scheme where U.S. investors could claim tax losses without the risk of economic loss. As proof, respondent offers a letter sent to investors regarding a limited window of time when they could sell or exchange their investments without any economic loss.

Second, respondent argues that Cinda (another member of the partnership) never intended to become a partner because Cinda sold or contributed most, but not all, of its interest after certain transactions were completed. Respondent also argues there was no business purpose because Cinda never tried to collect on the NPLs, even though it was contractually obligated to do so.

Third, respondent argues the transactions were not business-related and were only used to increase the U.S. investors’ outside basis, noting that none of the partners took legal action when Cinda breached its agreement to service the portfolio. Petitioners acknowledge some underperformance by Cinda but also observe that other reports showed proceeds from Cinda’s collection efforts.

Respondent also cites several cases where other partnerships, like petitioners, dealing with distress assets/debts (also known as DAD transactions) were sham partnerships.

The Court uses Culbertson as the applicable legal standard and finds respondent’s arguments legally inadequate and unsupported by the record. Even if tax losses are the primary purpose for a partnership’s formation, the partnership can also have a secondary purpose of conducting business. In cases that failed the Culbertson test, evidence showed that the partners ultimately had no real interest in collecting on the NPLs. If facts show an objective of profiting from collection, even if utilizing substantial tax losses outweighs that objective, then the partnership should not be disregarded as a sham under Culbertson.

Respondent fails to establish that partners were not at risk of economic loss on an ongoing basis, because the letter he relies on only references a limited opportunity to avoid risk of economic loss. Respondent also does not establish that Cinda failed to fulfill its contractual obligations and assumes that a 1% interest in the partnership is too small to be recognized, but this position is not supported by law.

All in all, respondent does not establish that the partnership was so indifferent to collection that it fails the Culbertson test, so this is a question of fact that must be resolved at trial.

Respondent’s section 482 adjustment argument is a disputed legal question because Courts are split about whether the IRS can make adjustments to transactions between two related foreign entities when neither are subject to U.S. tax. The Court finds it is not necessary to resolve this question because respondent has not clearly established that the foreign entities were related or under common control.

Home Sweet Tax Home

Docket No: 5699-17S, Peter Changching Lai & Kaiting Su v. C.I.R. (Order here) 

This designated order is a bench opinion about whether a petitioner is entitled to deduct expenses incurred travelling away from his primary residence for work in 2012 and 2013. Section 162(a)(2) allows such deductions if the expenses are reasonable and necessary, incurred “away from home” and made in pursuit of a trade or business. What confuses many taxpayers is that in most jurisdictions, home means “tax home” which is the taxpayer’s principal place of business and not primary residence.

We occasionally see similar cases in Colorado involving taxpayers who work in the oil and gas industry.

Petitioner-husband is a rocket scientist who worked in southern California. He was laid off and took a job in northern California and around the same time married petitioner-wife who remained in southern California.

A taxpayer’s tax home depends on the length of the job assignment. If the employment is temporary (one year or less), a taxpayer may be able to deduct the travel expenses incurred, including meals and lodging. If the employment is indefinite (longer than a year), then the new location becomes petitioner’s tax home and the expenses cannot be deducted.

Petitioner worked in northern California for more than three years, so his job was indefinite, and therefore, he was not entitled to deduct his expenses in 2012.

In 2013, after northern California had become his tax home, he was assigned to a project in southern California. Rather than decide whether petitioner is entitled to deduct his 2013 expenses under section 162(a)(2), the Court finds petitioner’s testimony establishes that he was entitled to reimbursement by his employer for the expenses and the Court disallows the deduction on that ground.

Petitioner also did not properly substantiate some of his charitable donations.

Expert Witness Misses Mark in Medical Marijuana Case

Docket No: 13666-14, Laurel Alterman & William A. Gibson v. C.I.R. (Order here) 

The Court rules on evidentiary matters related to deductions for a medical marijuana business in this designated order.

Petitioner challenges several items that respondent seeks to admit on relevancy grounds, such as 2008 and 2009 tax returns (the year at issue is 2011), petitioner’s medical marijuana growing license and petitioner’s application to the city of Boulder to approve the grow site. The Court finds each relevant because, in one way or another, they help establish the cost of goods sold in the year at issue.

Petitioner also challenges admitting the testimony of a revenue agent. The Court finds the agent’s testimony relevant because it describes how the agent calculated the cost of goods sold amounts conceded to by respondent.

Respondent objects to admitting a report and oral testimony of petitioner’s expert witness and the Court looks to Federal Rules of Evidence 702 and Tax Court Rule 143(g) to determine whether either can be admitted.

There are three items that the expert witness’s testimony and report attempt to support: 1) cost of goods sold amounts; 2) the ratio of cost of goods sold to gross receipts, and 3) the expenses not subject to section 280E.

The Court found the expert’s testimony did not satisfy Rules 702 or 143(g) because he used insufficient facts and unreliable methodology. For example, the expert did not independently verify gross receipts even though there was a discrepancy between the general ledger and the tax return amounts. He also ignored beginning and ending inventories in his cost of goods sold calculation, and generally did not provide enough information to explain how he arrived at his conclusions.

Although the expert’s testimony had been used in a previous marijuana business case, the Court knew more about the returns in that case and the business bought all its marijuana merchandise from third party sellers, unlike petitioner’s business which grew some of its own marijuana merchandise.

It is important that experts understand the facts and use reliable methodology so that their findings can be admitted.

Non-Designated Order News

Docket No. 5469-16L, Rajiv Khanna & Vivian Cheng-Khanna v. C.I.R. (Order here)

This non-designated order asks respondent to supplement its motion to dismiss for lack of jurisdiction. This issue is one we have seen before: whether a CDP hearing request deadline can be equitably tolled. I wrote a post on this issue a couple of months ago here.

Petitioners, who reside in the Third Circuit, timely mailed their CDP request to the wrong IRS office which then forwarded it to the correct office where it was received after the deadline. The first hurdle the Court asks respondent to address is whether the Tax Court petition was timely. If so, the Court directs respondent to address three items: 1) the statutory basis for respondent’s position that a taxpayer must file a CDP request within 30 days, 2) the impact of recent Supreme Court and Third Circuit Appeals cases concerning equitable tolling, and 3) the circumstances surrounding the forwarding of the request and the possibility that the forwarding would render the hearing request timely.

Respondent’s supplemented motion is due by March 15th, so again, we will wait to see if this case breaks some ground on this issue.