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.

 

Designated (and other) Orders from January 15 through January 26

The past two weeks of designated orders have been light which allows us to combine two weeks of orders and get back on schedule. Samantha wrote up the first set of orders and William wrote up the second set. They continue to do a great job combing through Tax Court orders to allow us to see what the Tax Court thinks is important and to provide a discussion of cases that generally go unobserved in the tax press. Included in the designated orders is more fall out from Graev. Keith

Designated Orders 1/15 – 1/19

In stark contrast to my pre-holiday week post, during the week of January 15 the Tax Court only found four orders worthy of “designated” status and three of the four were very brief. I discuss two below, the other two were: 1) another motion for summary judgment is scheduled for a hearing so respondent can address how the Graev III decision may impact the motion and the case (here); and 2) an order granting a hearing on a motion to dismiss for lack of prosecution (here).

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Disallowing Extension is Not Abuse of Discretion

Docket No. 16456-17 L, John Lucian v. C.I.R. (Order here)

This designated order was the lengthiest of the group and is somewhat unique because the petitioner is represented by counsel, however, the mistake made by petitioner’s counsel is one pro se petitioners frequently make. Petitioner’s counsel did not provide the IRS with a financial statement, and thus, foreclosed the possibility of a collection alternative in a CDP hearing.

This order decides respondent’s motion for summary judgment to which petitioner’s counsel had an opportunity to respond, but did not.

Petitioner had requested an extension to file the tax returns for the years at issue, but never actually filed so the IRS prepared substitute for returns and assessed the balances, interest and penalties. The petitioner did not make any payments and eventually received a notice of intent to levy. Petitioner’s counsel requested a CDP hearing stating that petitioner could not pay the balance and that health issues had caused the petitioner to cash out his savings and retirement.

As usual in these types of cases, the settlement officer requested a collection financial statement. The settlement officer also requested a 2015 tax return and proof that petitioner had made estimated tax payments for the current year. Petitioner’s counsel filed the 2015 return but did not have a financial statement completed by the hearing date and requested more time which the settlement officer granted. The extended deadline date came, and petitioner’s counsel still did not have the financial statement completed, so he requested yet another extension. The settlement officer denied the request for a second extension and instead directed petitioner’s counsel to contact the collection unit once he had the information. Then the settlement officer issued a notice of determination sustaining the proposed levy.

It is not clear if the reason petitioner’s counsel was unable to comply with deadlines was due to the petitioner not supplying counsel with information in a timely manner, however, the Court reprimanded petitioner’s counsel by stating, “[Petitioner’s counsel], as an attorney, understands the importance of filing due dates and has a professional responsibility to exercise due diligence.”

The Court also pointed out that the Appeals Office will attempt to conduct a CDP hearing “as expeditiously as possible under the circumstances” but there is no time frame mandating when the Appeals Office must issue a notice of determination nor is there a time frame for when they must keep a case open despite not receiving requested information.

The Court finds the settlement officer did not abuse her discretion by not allowing a second extension for the financial statement, because she is not required to give extensions. The settlement officer was ultimately unable to determine an appropriate collection alternative due to the lack of information, which is also not an abuse of discretion, so the Court grants respondent’s motion for summary judgment.

No Jurisdiction Over Petitioner’s Requests

Docket No. 9661-16, Pankaj Mercia v. C.I.R. (Order here)

In this designated order the Court has already entered a stipulated decision, but the petitioner files a motion which the Court treats as a motion to revise pursuant to rule 162.

The Court denies the petitioner’s motion to revise. The case is a deficiency case concerning 2009, 2010, and 2011, but the petitioner’s motion requests relief for earlier years, later years and for collection-related issues. The petitioner also requested relief from credit reporting agencies. The Court does not have the authority to assist the petitioner with nearly all the issues he raised.

The one issue the Court may be able to address is petitioner’s allegation that the IRS assessed more tax than what the Court had determined he owed at the end of his Tax Court case. The Court can review claims of excessive interest, but that type of claim is not raised by the petitioner. The Court amount assessed is correct and consists of the amount decided in Tax Court plus the amount petitioner self-reported when he filed his tax return.

This is another good example of the Court trying to understand a pro se petitioner’s arguments and assist him through the process, while also being bound by subject matter jurisdiction.

Designated Orders: 1/22/18 to 1/26/18 by William Schmidt

In continuing the theme of light weeks for designated orders from the Tax Court, there were 2 orders this week.

The first, Charles Asong-Morfaw v. Commissioner, is a denial of petitioner’s motion for reconsideration of a denial of deductions for his vehicle. Since the Court did not believe he used it exclusively for business, he was only allowed to deduct mileage.

The second order, Cecil K. Kyei v. Commissioner, is from a Tax Court case filed in 2012 that has been delayed due to multiple stays from the petitioner’s bankruptcy proceedings. The parties came to a settlement, prompting the Court to enter a decision. After entry of the decision, the Court learned that the automatic stay of B.C. 362(a)(8) deprived the Court of jurisdiction. The existence of the automatic stay required the Court to vacate that decision. This situation happens occasionally when a taxpayer files a petition while the automatic stay is still in existence (which deprives the Tax Court of jurisdiction over the case) or, as here, files a bankruptcy case while the Tax Court case was pending (which stops the Tax Court from taking any action on the case until the stay is lifted.) Once the stay was lifted, the IRS filed a motion for entry of decision on January 12, 2018, but based it on that previously vacated decision. The judge did not realize the motion was based on the vacated decision and had ordered that arguments on the motion would be heard on January 22, 2018. The petitioner did not appear and respondent renewed his motion for entry of decision, with the judge stating he expected to grant the motion.

At the time of this current order, the judge noted the omission and the motion’s reliance on the alleged agreement entered into during the automatic stay. The judge then ordered that the motion is denied without prejudice unless there is a complete motion that addresses how the agreement was not void by virtue of the automatic stay. Each of the parties are to make a filing as to their recommendation for further proceedings no later than February 16.

Non-Designated Orders

Since there is a low showing of designated orders, I am going to turn to two non-designated orders brought to the attention of the Procedurally Taxing brain trust by Bob Kamman (the titles are his also).

  • Don’t Show Up For Trial; Win Graev Penalty Issue Anyway

Docket # 6993-17S, Clay Robert Kugler v. Commissioner (Order of Dismissal and Decision Here).

Petitioner did not appear for trial in Fresno on December 11, 2017. The Court directed the IRS to file a supplement to their motion to dismiss, showing that it is appropriate to impose a penalty under IRC section 6662(a) in that case. On January 18, 2018, the IRS filed their supplement, stating they concede the petitioner is not liable for the penalty. Petitioner failed to respond to respondent’s motion. The order decides that petitioner is not liable for the accuracy related penalty under IRC section 6662(a) for tax year 2014.

Despite the fact that the petitioner did not show up for trial and did not respond to respondent’s motion, the Tax Court’s focus on Graev led to the removal of a 6662(a) accuracy related penalty!

  • Oops!

Docket # [Redacted for Reasons Cited Below].

One Tax Court order last week had an attached copy of the petition, with the statement of taxpayer identification number included, potentially revealing social security numbers for the petitioners to others in the world with internet access. The Court immediately corrected the order when the problem was brought to their attention. Just like all of us the Court occasionally makes mistakes. Sometimes it is worth double checking the electronic footprint of your case to make sure what goes up is what you intended to go up. We mention this case to set the scene for the following practitioner’s tips.

Takeaways:

  • The statement of taxpayer identification number is regularly used by the Tax Court to keep a record of the social security number of the petitioner(s). It is not scanned and uploaded as part of the public file accessible by others. Quickly alert the Court in the unusual event this document is mistakenly scanned and made a part of the public record.
  • Before sending documents to the Court make sure to review the every document submitted to the Tax Court as part of the petition package. Carefully review the notice of deficiency or other IRS documents in order to redact the social security number of the petitioner(s).
  • Check all of the numbers on the IRS correspondence thoroughly before sending to Tax Court. Innocent-looking barcodes that have a sequence of numbers beneath them can contain a petitioner’s social security number. It is worth comparing the social security numbers of the petitioners to all of the number sequences in order to make sure the redacting is complete.
  • If your client files a bankruptcy petition while a Tax Court case is pending, alert the Court immediately. The Court will then issue an order placing the case in suspense and order the parties to file periodic status reports alerting the Court to the lifting of the stay so that the case could once again move forward.

 

 

Designated Orders 12/18/2017 – 12/22/2017: Basis, Discretion to Reject Offers and Restitution Interest

Regular DO guest poster Professor Samantha Galvin of the University of Denver catches us up on some interesting designated orders during a busy pre-holiday week at the Tax Court. Les

The Tax Court issued seventeen designated orders the week ending December 22. Prior to reviewing them closely, I assumed it was a push to get a lot accomplished before the holidays and the end of the year, but nine of the seventeen designated orders (including three consolidated dockets) were issued in light of the Graev decision and many were discussed as part of Keith’s post here.

I discuss three of the eight non-Graev designated orders below. The five remaining orders not discussed involve: 1) a petitioner’s motion for reconsideration relating to a 6621(c) penalty (here and discussed briefly below); 2) a denial of a petitioner’s motion for summary judgment and motion to compel discovery (here); 3) a grant of respondent’s motion for summary judgment in a CDP case where petitioners’ failed to propose a collection alternative (here); 4) a denial of petitioner’s motion for reconsideration on a consolidated docket (here); and 5) a grant of respondent’s motion for summary judgment in a CDP case where a petitioner improperly attempted to raise an underlying liability (here).

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The issues discussed below include an interesting basis computation question when a seller transfers a partial interest in property to a taxpayer that improved the property prior to a subsequent sale to a third party, Appeals’ discretion to reject offers in compromise, and restitution interest abatement and res judicata.

Court Corrects Computations to Basis When There is an Interim Sale of an Interest in Property

Docket No. 021378-03, Stephen M. Gaggero v. C.I.R. (Order here)

It is rare for the Tax Court to grant a petitioner’s motion for reconsideration but it happened, in part, in two different cases two weeks ago. I only discuss this case. The other case involves a section 6621(c) penalty, but the motion is granted only to change certain phrases in the original opinion to reflect the Court’s intended meaning.

To be successful with a motion for reconsideration a petitioner must show that the Court made more than a harmless error pursuant to Rule 160. In this case the error in the original opinion, according to the Court, was a failure to understand that the sale of a share of property to a construction company in exchange for the construction company’s improvements made to the property should have been reflected in petitioner’s adjusted basis when he and the construction company jointly sold the property to a third party in a subsequent transaction. In essence the petitioner sought to add the FMV of the services he received from the constriction company to the basis for purposes of both the initial transfer of a partial interest to the construction company and on the subsequent third party sale.

This error could have been corrected using Rule 155 computations, but the parties cannot agree on the correct numbers. Pursuant to Rule 155(b) if the parties cannot agree, the Court has the discretion to grant them an opportunity to present arguments about the amounts so that the Court can determine the correct amount and enter its decision accordingly.

In this designated order, the Court looks to the closest analogous case which is Hall v. Commissioner, 65 T.C.M. 2575 (1993). In Hall it was held that, “the value of the carpenter’s services did not increase the sellers’ basis in the property for the sale to the carpenter but would increase the basis in the remaining share of the property on any later sale to a third party.” The parties cannot agree about the way the rule in Hall should apply to petitioner’s case. Petitioner argues that the portion of the property exchanged for the construction company’s services should increase his basis on both the partial sale to the construction company and the joint sale to the third party; whereas Respondent argues that the increase in basis should only apply on the joint sale to the third party.

The Court finds that respondent’s application of Hall is correct and the amount determined in the original opinion is not correct. The Court proceeds to go through a calculation using what it has now determined to be the correct amount.

The other findings and holdings from the original opinion are unchanged but require another attempt at Rule 155 computations, however, with the Hall-related dispute laid to rest hopefully the parties will agree going forward.

Offers and IRS Discretion

Docket No. 25587-15SL, Randolph and Jennifer Jennings v. C.I.R. (Order here)

In this designated order the Court is ruling on cross-motions for summary judgment. The case originates from a notice of determination issued after a timely requested CDP hearing on a proposed levy. Petitioners indicated that they wished to submit offer in compromise in their CDP request, but submitted the offer prior to the IRS acknowledging the CDP request and prior to the hearing. The settlement officer learned that the offer had already been submitted and waited for a decision from the offer unit before evaluating the proposed collection alternative.

The offer unit determined petitioners’ reasonable collection potential was higher than the amount of their offer, in part due to the cash surrender value of a life insurance policy. Following the offer unit’s reasoning, the settlement office also rejected the OIC but first allowed petitioners to increase the amount of their offer which would have required them to surrender the life insurance policy. Petitioners were not willing to surrender the policy, so the settlement officer issued a notice of determination sustaining the proposed levy.

Petitioners argue the settlement officer abused her discretion by not considering their poor health and limited employment opportunities, but the Court finds the offer unit considered these things. Petitioners did not propose a different collection alternative other than the offer.

The Court denies petitioners’ motion for summary judgment and grants respondent’s motion. The Court highlights the fact that accepting or rejecting an offer is within the IRS’s discretion and the Court does not interfere with that discretion unless it finds the decision is arbitrary. In this case it is not arbitrary for the IRS to sustain the levy because petitioners’ offer was rejected, petitioners refused to increase the offer amount, and they did not propose any other collection alternatives.

Restitution Res Judicata

Docket No. 12358-16, Debra J. Ray v. C.I.R. (Order here)

This case involves petitioner’s arguments that the IRS improperly assessed interest on her District Court ordered restitution and that the restitution had already been paid in full. Both parties have moved for summary judgment.

Petitioner was ordered by the District Court to make restitution payments after being convicted of criminal tax fraud for filing a false tax return. In that case, the District Court agreed to waive interest and applied a $250 credit toward the restitution. A few months after the District Court decision was made, petitioner paid the restitution in full and the U.S. Attorney filed a satisfaction of judgment with the District Court.

Then several things happened around the same time, the IRS: assessed liability for tax year 2000, assessed restitution and interest finding that petitioner had not fully paid the restitution, and applied her restitution payment toward the tax year 2000 liability.

The IRS issued a Notice of Tax Lien Filing on the restitution amount and interest. Petitioner timely requested a CDP hearing.

Petitioner claimed she had paid restitution in full. After clearing up confusion about whether the lien was filed on the restitution or liability amount, but instead of looking into underlying issue, the settlement officer agreed to withdraw the lien and placed petitioner’s account into currently not collectable status. The interest on the restitution was not abated and petitioner’s claim that she did not owe restitution was not considered.

Petitioner then appealed the CDP determination. The appeals officer examined petitioner’s case and determined that interest abatement was not appropriate since there were not any substantial ministerial or managerial acts that would warrant an abatement of interest. The appeals officer also determined that petitioner still owed $250 of restitution.

As for the interest component, the Tax Court had decided a similar issue in Klein v. Commissioner, 149 T.C. No. 15 (2017); Les discussed Klein in a post here, where he noted that Klein was an important case and one of first impression. The Klein opinion came out after the petitioner filed her petition but before her trial date. In Klein, after a thorough analysis, the Court held it did not have the ability to charge interest on restitution payments under section 6601. As a result of Klein, respondent concedes that petitioner should not be liable for interest on the restitution amount, but whether she still owes any restitution is at issue.

Since petitioner did not have an opportunity to raise the underlying restitution liability previously, the Tax Court’s review is de novo. The Court looks to the doctrine of res judicata which requires that: 1) the parties in the current action must be the same or in privity with the parties of a previous action; 2) the claims in the current action must be in substance the same as the claims in the previous action; and 3) the earlier action must have resulted in a final judgment on the merits.

The Court finds the requirements are met: 1) the parties are the same as both cases involve the petitioner and the government (albeit different agents of the government); 2) the claims in substance both involve whether petitioner paid the restitution required by the judgment; and 3) the satisfaction of judgment filed by the District Attorney is a final judgment which binds the IRS and extinguishes the IRS’s right to collect any additional restitution.

 

As a result, the Court grants petitioner’s motion for summary judgment and respondent is ordered to abate the restitution assessment and corresponding interest.

The Idea of Equitable Tolling in Collection Due Process Request is Gaining Traction

Today we welcome guest blogger Samantha Galvin from the University of Denver. Professor Galvin is one of the four writers of our feature on designated orders published by the Tax Court. During the week she was “on” for the designated orders, the Court issued an which deserved its own post, and she took on that task. In the cases discussed below, the Tax Court reverses course and mitigates a somewhat harsh result that can occur when a taxpayer sends the CDP request to the wrong place within the IRS. The IRS has taken the position that if the taxpayer sends the CDP request to the wrong office, the taxpayer loses their right to a CDP hearing if the request does not find its way to the proper office within the 30 day time period allowed for making such a request. This rule has tripped up a number of pro se and represented taxpayers and becomes even harder to meet when the IRS gives wrong information. One issue raised by the cases Professor Galvin writes about today is whether these decisions represent a crack in the door regarding equitable tolling. Keith 

In the last couple of months, two designated orders have come out that suggest an unstated, equitable tolling exception may exist when it comes to collection due process (CDP) hearings requested pursuant to sections 6330 and 6320(a). The two most recent designated orders are Tarig Gabr v. C.I.R., Docket No: 24991-15 L (order here) and Taylor v. C.I.R., Docket No: 3043-17 L (order here). This issue has previously been covered in PT posts by Carl Smith most recently here and here.

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Typically, a taxpayer, or his or her representative, must request a collection due process hearing to the appropriate IRS office within 30 days from receiving either a “Final Notice of Intent to Levy” (LT 11) or a “Notice of Intent to File a Lien and Your Right to Request a Hearing” (Letter 3172).

The designated orders involve taxpayers who sent CDP requests within the 30-day period, but to the wrong IRS offices. The requests were not received by the correct offices until after the 30-day deadline. As a result, the IRS denied the taxpayers a right to a CDP hearing and instead granted them an equivalent hearing. If a request is not timely as to the 30-day deadline, but sent within one year a taxpayer is entitled to an equivalent hearing. An equivalent hearing provides a forum with IRS Appeals similar to a CDP hearing, however, it does not provide the same protection from collection or allow for judicial review.

The IRS and Tax Court’s position has generally been that the 30-day deadline is jurisdictional, which means it cannot be subject to equitable tolling. If it is instead a claim-processing rule, then there is an argument to be made that equitable tolling may apply in some cases.

The door to make this argument was opened by the Supreme Court in the context of veterans’ affairs related claims. In Irwin v. Department of Veteran’s Affairs, 498 U.S. 89 (1990), the Supreme Court held that a rebuttable presumption of equitable tolling should apply to suits against the United States, unless Congress clearly intends otherwise.

As to the question of whether the 30-day deadline is jurisdictional, in Henderson v. Shineski, 131 S. Ct. 1197 (2011), the Supreme Court urged courts to discontinue using the word “jurisdiction” for claim-processing rules, stating that the conditions that accompany the jurisdiction label should be reserved for rules that govern a court’s adjudicatory capacity such as subject-matter or personal jurisdiction. The Supreme Court acknowledged that it must look to Congress’ intent for a clear indication that a deadline is intended to carry harsh jurisdictional consequences before deciding whether equitable tolling should apply.

There have not been any Tax Court cases that decide whether equitable tolling should apply to collection due process requests, but in the recent designated orders the Tax Court rejects respondent’s argument that the Court lacks jurisdiction when a collection due process hearing request is filed within 30 days but sent to the wrong IRS office. According to respondent, this contradicts sections 7502 and 7503 which are used to determine timeliness only if a request is properly transmitted pursuant to Treas. Reg. sections 1.301.6320-1(c)(2) Q&A C-6 and Q&A C-4. In other words, respondent argues timeliness is only met when a request is sent within 30 days to the office where the request is required to be filed.

In Gabr, the taxpayer’s representative allegedly received erroneous instructions from an IRS employee and faxed the CDP request to the wrong office. In determining whether to grant or deny respondent’s motion to dismiss for lack of jurisdiction, the Tax Court acknowledged guidance from the Internal Revenue Manual section 5.9.8.4.2(8) that provides that if a taxpayer receives erroneous instructions from an IRS employee resulting in the request being sent to the wrong office then the postmark date for when the request was sent to the wrong office is used to determine timeliness.

In Taylor, however, there were no erroneous instructions given, rather the representative sent the request to a local office, instead of the office listed on the notice. Respondent relies on cases dealing with tax return filing and the assessment statute, bankruptcy, and foreclosure and lien withdrawal to argue that the CDP request cannot be equitably tolled. Respondent also relies on Gafford v. Commissioner, T.C. Memo 16-40, citing Andre v. Commissioner, 127 T.C. 68 (2006), where the Court held that requiring taxpayers to follow claim-processing rules creates procedural consistency in effectively and efficiently processing such requests. But Andre is distinguishable from Gabr and Taylor, because Andre dealt with a request that was sent to an incorrect address prematurely, prior to the issuance of an LT 11 or Letter 3172.

In Taylor, the Tax Court was not convinced by any of respondents’ arguments since it denied respondent’s motion to dismiss for lack of jurisdiction and stated that respondent did not demonstrate sufficient prejudice to enforce strict compliance with the Treasury Regulations on the matter.

Does this mean these cases will result in decisions that can be relied upon to argue that the 30-day deadline can be equitably tolled for CDP requests in certain circumstances? So far, no. In Gabr, respondent conceded the case so the final decision issued by the Court did not speak on the issue. We will have to wait and see what happens in Taylor, but at the very least these designated orders suggest the Court is open to entertaining the argument.

WARNING: In Guralnik v. Commissioner, 146 T.C. 230, 235-238 (2016), the Tax Court held, en banc, that the different 30-day period in section 6330(d)(1) to file a Tax Court petition after a CDP notice of determination is issued is jurisdictional and not subject to equitable tolling under current Supreme Court case law. But the sentence containing the 30-day period in section 6330(d)(1) explicitly contains the word “jurisdiction”, while the 30-day periods in subsections (a)(3)(B) of section 6320 and 6330 do not. Keith and Carl Smith are in the midst of litigating whether the Tax Court’s position in Guralnik is correct in both Cunningham v. Commissioner, Fourth Circuit Docket No. 17-1433, and Duggan v. Commissioner, Ninth Circuit Docket No. 15-73819 (both cases where taxpayers mailed off their petitions a day late, but argue that they were misled by the language of the notice of determination that appeared to give them 31 days to file courting from the day of the notice of determination). Oral argument happened in Cunningham on December 5, and you can hear the argument here. (Harvard Federal Tax Clinic student Amy Feinberg argued the case for Ms. Cunningham.) Whichever way the Cunningham case comes out, it is clear that the judges there were giving Keith’s and Carl’s argument a serious hearing and not dismissing it lightly. The Duggan case was submitted without oral argument on December 7.