The Benefits of Tax Court… Designated Orders April 22 – 26, 2019

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There are numerous benefits of having your case before the Tax Court, rather than Federal District court. In case books, those benefits are usually distilled to (1) the fact that Tax Court is a pre-payment forum, and (2) the expertise of the Tax Court judges (as opposed to generalists in federal court) in dealing with tax law. At least three of the six designated orders issued during the final week of April 2019 exemplify the latter benefit. The remaining orders, however, demonstrate a third, equally important but often unspoken benefit of Tax Court as a venue for disputes: the patience and experience of Tax Court judges in working with pro se petitioners.

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The Patience (and Boundaries) of the Tax Court. Brown v. C.I.R., Dkt. # 20102-17 (order here)

In some ways, the deeper structural value of our judicial system is simply the feeling that you have a chance to be heard. It may be less about the dollars at issue than the sense that you are being treated unfairly by the IRS -likely on matters that you don’t fully understand. So it is in the above case, where Judge Gustafson goes to great lengths to allow the petitioners their chance to be heard -where others may say that they have already had more than their fair share of that chance.

In this case, the IRS had conceded back in February that there was no deficiency due from the taxpayers… and so moved for an entry of decision to that effect. However, the taxpayers didn’t take “no deficiency” as a (good enough) answer, thereafter (and apparently for the first time) raising the issue that they actually should be due a refund. To get to the bottom of the issue, the Court asked the petitioners for a “succinct statement of the decision that they believe the Court should enter[.]”

Suffice it to say, the taxpayers did not comply with that directive, and instead brought up a lot of extraneous issues and general legal gripes (for example, seeking to bring in the petitioner’s employer as a defendant). This led to an entry of decision confirming that the petitioners didn’t have a deficiency, but also weren’t getting anything else refunded to them.

Petitioners weren’t happy with this, and so filed a motion to vacate, this time sufficiently bringing up the overpayment issue -or at least sufficiently for Judge Gustafson to calendar the motion to be heard in Court. Because the overpayment issue wasn’t properly raised in pleadings, Judge Gustafson even gives a few extra tips to the petitioners on what they’d need to do should they prevail on their motion to vacate -namely, file a motion to amend their petition under Rule 41.

And for what has this intricate, time-consuming, and costly sequence of events revolved around? A potential refund that Judge Gustafson calculates as, at a maximum, $92. Since the dispute only concerns $232 of allegedly over-stated wages, this refund amount would result only if the taxpayers are in the highest marginal bracket (which is doubtful).

But that isn’t the point. The point is that the taxpayers feel wronged and want their day in court to be heard. Kudos to Judge Gustafson in taking that right seriously.

(UPDATE: Judge Gustafson ended up granting the motion to vacate (order here) and both parties eventually agreed to a small “overassessment to be abated” of $65 (see decision here). Still no refund, however, as apparently the petitioner had self-reported a fairly large liability to begin with… Hat-tip to Bob Kamman for following up on this case and sending it my direction.)

Of course, Judge Gustafson’s patience is not boundless, nor should it be. In two other designated orders that don’t warrant great detail (here and here) where the petitioner failed to show up for trial -that is, to exercise their rights- Judge Gustafson had no problem dismissing for lack of prosecution. 

Tax Court Expertise: Showing Your Work on Qualified Dividends. Bara v. C.I.R., Dkt. # 17107-17SL (order here)

Bara involves the somewhat rare Collection Due Process review where the underlying tax is (perhaps) properly at issue under IRC § 6330(c)(2)(B). Or at least the parties act as if the underlying liability is properly at issue – Chief Special Trial Judge Carluzzo hints that it is perhaps an unsettled question. Since the deficiency appears to have been determined by a Math Error notice, and not a Notice of Deficiency, the question would be resolved based on whether the taxpayer had a “prior opportunity to dispute the tax” –which can be a rather murky inquiry. See posts here, here, and here. But rather than upset the apple cart, Special Trial Judge Carluzzo simply says he will “follow the lead” of the parties and treat the liability as if it were properly at issue.

Both parties filed motions for summary judgement on the issue of whether petitioner had properly computed his tax on qualified dividends. Since the material facts were not at issue on that matter, it was ripe for Judge Carluzzo to render a decision… which he does in a tremendous example of statutory analysis.

One would think that calculating the tax on qualified dividends is fairly simple. Generally, we entrust it to our tax software and don’t give it a second thought. But were you to try to figure out solely by reading the statute at issue (IRC § 1(h)), you may be excused if you were left with a headache and confusion. Judge Carluzzo “shows his work” in how to compute the tax under the relevant statute with almost four pages of walkthrough on how the code section works. I won’t repeat it here, but I will commend others to take a look. It is a startling example of how something seemingly so simple (a preferential tax rate) can be so convoluted.

It isn’t clear how the taxpayer made the mistake of treating the qualified dividends as taxed at a zero rate -it appears that he did, in fact, report the dividends on his return, so it wasn’t simply an omission. And unless you are Judge Carluzzo, these calculations are best done by computers -ergo the “math error” treatment by the IRS under IRC § 6213. Kudos to Judge Carluzzo, in any case, for walking through why it should be calculated the way the IRS did, and showing the work we generally entrust software to do for us.

Expertise of the Tax Court, By Necessity. Whistleblower 6388-17W v. C.I.R. (order here)

On other areas of tax law the Tax Court necessarily has more expertise than federal district courts, because they have sole jurisdiction over the subject matter. This includes whistleblower and Collection Due Process cases (the latter could go to District Courts until 2006, but cannot any longer). Like Collection Due Process, the whistleblower statute is still being developed. One issue that has been recently determined is the scope of review of whistleblower actions which, in accordance with Kasper v. C.I.R., 150 T.C. 8 (2018) is limited to the administrative record.

As Judge Guy notes, there is a natural tension in whistleblower cases “between the general rule of protection prescribed in section 6103(a) [e.g. confidentiality of other people’s tax return information] and the parties’ obligations to exchange information in a good-faith effort to arrive at basis for settlement[.]” This tension manifests itself when, as here, the IRS heavily redacts the administrative record (which the whistleblower would rely on) on the grounds that the information is protected under IRC § 6103.

And so, to get clarity on these competing concerns (petitioner’s ability to properly prosecute a whistleblower case and respondent’s imperative to protect certain tax information), Judge Guy essentially orders a summer exam for the parties. Both are to write separate memoranda “providing a comprehensive discussion and analysis of the applicability or nonapplicability (as the case may be) of the provisions of section 6103, and particularly the exceptions prescribed in section 6103(h)(4)(A), (B), and (C), both in the broad context of this whistleblower action and with regard to the specific categories of redacted documents [at issue in the order.]” If that looks like a law-school exam prompt, it gets even better: the parties are expected to “address the plain language of the statute, legislative history, and significant legal precedent in support of their positions.” A happy summer to all…

Expertise on Assessment Issues in Collection Due Process. Jarvis v. C.I.R., Dkt. # 19387-18SL (order here)

I noted above that I find it somewhat rare for a petitioner to successfully or appropriately raise the underlying liability in a Collection Due Process hearing. The order in the Jarvis case is an example of the more common outcome: you had your chance to argue the liability before, and you don’t get a second bite at the apple. In Jarvis, however, it appears that petitioner actually wants a third bite. To wit, the taxpayer had already argued the liability in a previous Tax Court deficiency proceeding (which was dismissed for failure to prosecute when the taxpayer didn’t show up for trial), raised again on a motion to vacate, and raised still another time when the taxpayer appealed to the Second Circuit. The appeal to the Second Circuit, after failing to prosecute the case, begins to seem like a delay tactic on paying… which is not successful because, as Judge Armen points out, an appeal does not stay assessment and collection unless you post bond. See IRC § 7485(a). Since petitioner didn’t post bond (that is, put some skin in the game rather than indefinitely delay the IRS from collecting) AND petitioner has not raised any issues about collection alternatives, the proposed levy is appropriate.

No third bite of the apple for the taxpayer in this case. And no more patience from the Court needed.

Caleb Smith About Caleb Smith

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

Comments

  1. Norman Diamond says

    ‘Or at least the parties act as if the underlying liability is properly at issue – Chief Special Trial Judge Carluzzo hints that it is perhaps an unsettled question. Since the deficiency appears to have been determined by a Math Error notice, and not a Notice of Deficiency, the question would be resolved based on whether the taxpayer had a “prior opportunity to dispute the tax” –which can be a rather murky inquiry. See posts here, here, and here. But rather than upset the apple cart, Special Trial Judge Carluzzo simply says he will “follow the lead” of the parties and treat the liability as if it were properly at issue.’

    If a Math Error notice was actually issued then the taxpayer probably had an opportunity to demand abatement. If the notice was sent to a wrong address, or without sufficient postage, or without a date in its postal meter, or if 60 days wasn’t long enough for letters to go back and forth (which is the reason Notices of Deficiency get 150 days), etc., then the taxpayer probably didn’t have an opportunity.

    Now, how many days ago did we see discussion of whether courts are supposed to sua sponte police issues of lack of jurisdiction? And somewhat longer ago, the fact that parties agreeing to jurisdiction by a court isn’t enough to confer jurisdiction on a court.

    If a Math Error “notice” was entered in IRS administrative records without an actual notice being issued to the taxpayer, the taxpayer didn’t have an opportunity, but no court accepts jurisdiction to order the IRS to issue an actual notice.

    ‘One would think that calculating the tax on qualified dividends is fairly simple.’

    Not when the dividend payer is located in the country where the taxpayer lives instead of being located in the US.

    ===

    ‘As Judge Guy notes, there is a natural tension in whistleblower cases “between the general rule of protection prescribed in section 6103(a) [e.g. confidentiality of other people’s tax return information] and the parties’ obligations to exchange information in a good-faith effort to arrive at basis for settlement[.]”’

    Not any more. The 9th Circuit ruled that when a tax return is subject to litigation, section 6103(h) allows full disclosure to the public, including social security numbers (as was done by both the IRS and the DOJ).

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