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Welcome To Tax Court, Now Go Home (Unless a Lawyer Volunteers)

Posted on May 28, 2020

We welcome back commenter in chief and occasional blogger Bob Kamman for another post with insights on matters otherwise missed.  Today, Bob’s post discusses interesting case outcomes but also the people who made it possible – the amazing volunteers at the calendar calls in New York City.  Frank Agostino has organized the local tax bar at calendar calls in NYC for many years and helped many taxpayers who had no expectation of such assistance when they showed up in court.  For his efforts at the NYC calendar calls and other pro bono work he does, the ABA recognized Frank with the Janet Spragens award in 2012.  Keith

If you’re looking for trouble, consider showing up at Tax Court trial sessions in Manhattan once they resume. Just ask New Jersey tax attorney Frank Agostino, who keeps going back for more – and that’s a good thing. His recent examples are cases decided the week of May 18, 2020: Peacock and Pope. In Peacock, Judge Vasquez notes:

When this case was called from the calendar, Mr. Agostino and Mr. Colasanto were present in the courtroom as volunteer lawyers. They entered appearances on behalf of petitioner husband for purposes of arguing the motion before us, and we are thankful for their pro bono service.

(Phillip Colasanto is an associate in Mr. Agostino’s firm. Brooklyn lawyer Alec B. Schwartz also appeared, later.)

What is most remarkable about these two cases, aside from the question of what would have happened without last-minute volunteer legal help, is that both involve an IRS notice of deficiency followed by a delayed IRS defense that the Tax Court lacks jurisdiction to review it. If the notice is the ticket to Tax Court, Chief Counsel is the bouncer who shows up much later to deny petitioner’s entry.

Peacock Case: Timeline and Result

March 11, 2016: IRS revenue agent issues a 30-day letter proposing full disallowance of $52,376 in expenses.

April 7, 2016: Taxpayer meets with revenue agent, who issues a “corrected report” disallowing all expenses but removing the accuracy-related penalty. Bottom line is $6,761 tax and $431 interest.

April 8, 2016: Taxpayer hands revenue agent a check for $7,192 with a four-page cover letter. The last page states,

Because our meeting yesterday was cut short due to time constraints, I request a follow-up meeting to discuss how I may amend my 2013 US Tax Return to better and more accurately reflect the . . . expenses that I claimed on Schedule C.  In the meantime, please find enclosed check no. 5324 dated today, April 8, 2016, in the amount reflected in your revised Form 4549-A. . . .I do, however, respectfully disagree completely with your determination.   I am working on completing IRS Form 12203 – Request for Appeals Review, and will submit it to you under separate cover.

April 8, 2016: An IRS transcript shows that this payment is recorded with a transaction code 640 as an “advance payment of tax owed.” With no corresponding assessment, the account will continue to show a credit balance in the same amount.

October 16, 2016: Taxpayer, having submitted the form six months earlier, writes to the Appeals office:

I have yet to hear from the IRS regarding my request for Appeals Review.  On April 8, 2016, I hand delivered . . .check number 5324 in the amount of $7,192 along with my letter dated April 8, 2016.  In that letter, I made it crystal clear that this payment was made in protest, and that I completely disagreed with the IRS determination.

March 27, 2017: Appeals issues a notice of deficiency for $6,544, slightly less than the $6,761 proposed in the revenue agent report.

May 24, 2017: Petition is filed with Tax Court. IRS answers June 23, 2017.

November 16, 2017: Trial is set for April 9, 2018.

March 15, 2018: Less than four weeks before trial, IRS files a motion to dismiss for lack of jurisdiction. It contends that the April 2016 payment extinguished the deficiency before the notice was issued.

March 28, 2018: Taxpayer responds that the remittance was not a payment but a deposit, preserving his right to petition.

April 9, 2018, continued to April 13, 2018: At Tax Court hearing, Frank Agostino enters his appearance for taxpayer. Simultaneous opening briefs ordered for June 27, 2018. These are filed, and simultaneous answering briefs are filed August 13, 2018.

Twenty-one months later, the 17-page Tax Court opinion by Judge Vasquez walks the parties through:

  • Code Section 6211 and cases decided under it, holding that if a deficiency is paid before a notice of deficiency is issued, then there is no deficiency and the Tax Court has no jurisdiction.
  • Code Section 6603, which nevertheless allows a taxpayer to make a cash deposit to pay any tax not yet assessed.  IRS guidance on how to do this is provided in Rev. Proc. 2005-18. Such a payment stops interest from accruing but preserves the right to petition Tax Court.

According to a footnote, IRS does not contend that the taxpayer’s letter with his April 2016 check fails to satisfy the Rev. Proc. 2005-18 requirements.

The Court then cites in detail various provisions of the Internal Revenue Manual regarding such deposits. The opinion reminds us (citations omitted),

To be sure, the IRM does not have the force of law . . . Nevertheless, the IRM can be persuasive authority . . . and a review of relevant IRM provisions is instructive in ascertaining the procedures the IRS expects its employees to follow . . .

The April 2016 check, on its memo line, contained the taxpayer’s SSN and the words “payment 2013 Federal Income Tax.” IRS contends that the word “payment” was enough to remove it from the category of “deposit.” Also, it claims he loses because he used the word “payment” in his October 2016 letter to Appeals.

Five pages later, after further references to the Internal Revenue Manual, the Regulations under Section 6213, and Rev. Proc. 2005-18, the Court finds “Petitioner husband properly designated the remittance as a deposit, respondent treated it as such, and the deficiency was never extinguished by a payment.”

The taxpayer may eventually lose his case, but he has won the right to keep it in Tax Court. Inoculated against attempts by IRS to deny him a trial less than a month before its first scheduled date, he may have a decision by 2021, regarding how much tax he owes for 2013.

Pope Case:  Timeline and Result

2018: Petitioner files a timely Form 1040 return reporting $42,163 in wages and $8,929 in federal income tax withheld. After child tax credit and child care credit, his tax is zero.

October 10, 2018: IRS sends petitioner a “Letter 4800C, Questionable Credit 30 Day Contact Letter,” informing him that $7,856 of his withholding had been disallowed. IRS has records of only $2,448 in wages received, and $1,073 in tax withheld.

November 20, 2018: After no response, IRS sends a notice of deficiency, which the Court describes:

…explaining that it had been unable to verify his reported wages and withholding.  The first page of the notice stated that his deficiency for 2017 was “$.00,” . . .The “tax deficiency computation” at the end of the letter shows the “change in tax shown on return” as zero, the “decrease to refundable credits” as zero, and the “tax deficiency” as zero.  The only adjustments appearing in this computation are a $26,407 downward adjustment to petitioner’s AGI and a $7,856 reduction in withholding credits.

February 13, 2019: Tax Court petition filed. IRS answers on April 29 (more than 60 days, but the government had been closed for 35 days, ending January 25).

March 15, 2019: IRS issues a refund for $1,273: Tax withholding of $1,073; $142 refundable child tax credit; and $58 interest.

August 27, 2019: Trial set for January 13, 2020.

January 3, 2020: IRS files a motion to dismiss for failure to properly prosecute.

January 13, 2020: Petitioner appears for trial. IRS withdraws its motion to dismiss for failure to prosecute, then moves to dismiss for lack of jurisdiction. Frank Agostino and Phillip Colasanto enter appearances. Petitioner is ordered to respond to IRS motion by February 12, 2020.

February 12, 2020: Petitioner’s response is filed. A footnote to the decision tells us he attached “a pay stub and a pair of Forms W-2, Wage and Tax Statement, that purport to show tax withholding in excess of the amounts that the IRS verified through third-party reporting.”

Unfortunately, those exhibits don’t matter. Judge Lauber explains why Sections 6201 and 6211 do not grant Tax Court jurisdiction in cases where the only dispute concerns the credit for income tax withheld. “Because we lack jurisdiction to redetermine the adjustments to petitioners’ 2017 liability, we do not consider these documents or his assertion that he did not actually overstate his withholding credits.”

What may have happened here is that the taxpayer’s withholding seemed to IRS algorithms far higher than needed for a single parent. The withholding he claimed was 21% of wages. Nevertheless, what IRS verified as withholding was 44% of wages. Employers can make mistakes, and it may take years for them to file corrected W-2 forms. IRS assumes the employer is correct, and expects the employee to promptly prove otherwise. The taxpayer may have been using tax withholding as a savings account. Or, he might have expected his annual income to be four times as great, but then was not employed for nine months.

The Tax Court might at least have suggested that IRS allow an audit reconsideration. That could avoid a District Court refund suit. Pro bono can do only so much. If Congress intended to remove withholding disputes from Tax Court jurisdiction, it could at least allow them when the issue is not raised by IRS until the day of trial.

****

While cases that result in Tax Court opinions contribute to a practitioner’s highlight reel, those that are settled with no fanfare deserve some attention also. So we should note the case of Marie Lucien, whose trial in a small-tax case before Judge Guy was set for December 9, 2019. Mr. Agostino entered a limited appearance and made an oral motion for continuance. IRS Counsel agreed. Less than three months later and just weeks before the Court closed its doors, a stipulated decision was entered for petitioner, agreeing that she owed no tax for 2016. Two other lawyers were also there to help out: Jonathan A. Zandi of New York, and Bimal K. Gupta of Parsipanny, N.J.

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