Source: https://procedurallytaxing.com/author/williamschmidt/
Timestamp: 2019-04-18 22:46:48+00:00

Document:
While there was a flood of designated orders immediately after the government shutdown ended, that was the height of the wave. This week is at low tide for the number of designated orders because there are only four orders to discuss. While there aren’t too many items of substance to discuss, each order has some interesting points on what to avoid with the IRS or Tax Court.
Docket No. 2805-18S, Tanisha Laquel Saunders v. C.I.R., available here.
In the past, one of my jobs involved taking questions from tax professionals, doing research, and providing written responses concerning their tax situation. During that time, I answered several questions concerning tax situations for students. I grew familiar with IRS Publication 970, Tax Benefits for Education, and used that as a starting point to answer several questions for what would be allowed on particular tax returns.
If you were to read through IRS Publication 970, a theme that you would find is that the IRS does not allow an individual to use the same qualified education expenses to claim multiple tax benefits.
That is the background for the case in question, which comes to us by a bench opinion from Judge Carluzzo. The petitioner was a full-time student at Los Angeles Pierce College. She received a Pell Grant to pay tuition and related educational expenses, with the remainder going to personal and living expenses. The petitioner chose to exclude from her income the portion of the Pell Grant used for qualified education expenses. This is a correct tax treatment of a Pell Grant with regard to qualified education expenses.
Where the petitioner went wrong is that she also decided to use those expenses for an education credit. The bench opinion only refers to the education credits allowed under Internal Revenue Code (IRC) section 25A. While the type of credit is not named, it was likely an American Opportunity Credit since the petitioner claimed both a nonrefundable and a refundable portion of the credit.
The judge does “congratulate and commend petitioner on pursuing her formal education”, but that does not prevent him from applying the law to the case. The judge sustains the IRS disallowance of the section 25A education credit, deciding in favor of respondent.
Takeaway: You are not allowed to double-dip when it comes to education-related tax benefits on the same expenses. Perhaps the petitioner could have used better tax planning by making the Pell Grant full taxable and then taking an American Opportunity Credit. Where she got caught by the IRS was where she excluded the Pell Grant from income, but also claimed the education credit. A taxpayer just cannot get two or more tax benefits from the same education expenses.
Docket No. 14578-18SL, Barry J. Smith v. C.I.R., available here.
I don’t have too much to say on this case. It is another example of a petitioner with a Collection Due Process (CDP) case who did not do much before the IRS filed a motion for summary judgment, leading to a decision for the IRS.
What caught my eye was a paragraph on the petitioner’s history. It stated that the petitioner’s representative asked for additional time to provide financial materials on the date that they were due (and got an extension). Next, when the settlement officer attempted to contact the representative for the scheduled telephone conference, there was no answer. The settlement officer left a message, stating no information had been received and a notice of determination would be issued sustaining the proposed levy. Later that day, the representative called back, explaining that his paralegal had been out. The representative indicated he planned to speak with petitioner the next day and hoped promptly to get back to the settlement officer with the required information. Nothing further was heard from the petitioner or his representative and no materials for consideration were submitted.
Takeaway: While we do not have the full story, my read on the situation is that the petitioner’s representative might also have been at fault. Whether that is the case or not, it is best if a petitioner’s representative helps the petitioner instead of adding to the case history of non-responsiveness to the IRS.
Docket No. 1395-16 L, Harjit Bhambra v. C.I.R., available here.
The IRS issued a Collection Due Process determination to sustain the filing of a notice of federal tax lien for restitution-based assessments and fraud penalties related to tax years 2003 and 2004. Petitioner appealed to the Tax Court. The Tax Court granted an IRS motion for summary judgment with respect to the restitution so what was at issue in this order was petitioner’s liability for the fraud penalties (the petitioner was able to have a CDP hearing regarding his liability because the liability was not subject to deficiency procedures). The Court issued an order remanding the case to IRS Appeals for a supplemental hearing where the petitioner could raise a challenge to the determination of the fraud penalties.
The Appeals Officer then sent a letter scheduling a telephone conference and the petitioner replied with his own letter. That letter demanded an in-person hearing that he would record, plus he also made inflammatory statements, such as “that the IRS agents are well qualified liars that cannot be trusted for any reason” and the District Court judge in his criminal trial is a “reckless buffoon”. Again, he submitted no evidence against the civil fraud penalties. After a telephone conference, the petitioner again did not submit anything to refute the penalties.
In the IRS supplemental notice of determination, Appeals found the Examiner was correct to assert IRC section 6663 penalties because all or part of the underpayment was due to fraud, the petitioner was criminally convicted per IRC section 7206(1) and 7206(2) for making a false tax return, and he presented no new evidence why he is not liable for the penalties.
In this order, the judge’s response is: “We will take petitioner up on his invitation. We assume that, in asking for us to send whatever we have in writing, petitioner seeks no further hearing and has no argument to make.” The judge sees no reason why decision should not be entered for the IRS to continue with collection of the restitution amount and the civil fraud penalties for 2003 and 2004. The petitioner is ordered to show cause on or before March 19, 2019, why there should not be a decision entered as described.
Takeaway: I always find that politeness and responsiveness go a long way to helping a court case. The petitioner might not have avoided a decision against him, but it would not have hurt.
Docket No. 8724-18 L, Jeffrey P. Heist v. C.I.R., available here.
Mr. Heist owned and operated US Alarm Systems, an alarm system installation and servicing business. For 2013 and 2014, he worked as a sole proprietor and filed a Schedule C on his tax returns to report his income. For 2015, Mr. Heist conducted his business through an S corporation and reported that income on Part II of Schedule E on his tax return. He had no other source of income than that alarm system business during those years. During those years, his customers used forms 1099-MISC to report payments they made to the business.
Mr. Heist filed tax returns for those years with a CPA on September 1, 2016. He reported either net profit on Schedule C or S corporation income on Schedule E, respectively, along with tax and penalties (including self-reported estimated tax penalties). He did not make estimated tax payments, had no payments as offsets against the tax or penalties and did not submit payment with the returns.
The IRS processed the returns and the amounts owing went unsatisfied, so the IRS sent a notice of intent to levy and notice of lien filing. This prompted him to amend his tax returns for the years in question.
How did Mr. Heist choose to amend those returns? He reduced his income, tax and penalties to zero for all three tax years. In support, he attached “corrected” Forms 1099-MISC he created, purporting to “correct” to zero the amounts of income paid by the customers of his alarm system business.
What is Mr. Heist’s justification for these amendments? His main argument is that he and US Alarm Systems performed no “trade or business” activities as defined in USC Title 26 Section 7701(a)(26). That defines the term “trade or business” to include performance of the functions of a public office, which Mr. Heist reads to exclude any other activities. The order cites multiple Tax Court Memorandum Opinions that have found this argument to be baseless and frivolous.
Mr. Heist was not asking for money from the IRS, so what’s the harm, right? Mr. Heist maintained at the telephone hearing and throughout the administrative process that he did not submit a frivolous return justifying any penalties. Other things he did not do were request any collection alternatives, provide any documents in support of alternatives, or argue that the tax lien should be withdrawn.
On April 25, 2018, the IRS issued a Notice of Determination sustaining the penalty assessments, the notice of lien, and the proposed levy. Mr. Heist timely appealed to the Tax Court, maintaining the same arguments. The IRS filed a motion for summary judgment which the petitioner opposed.
The Court analyzed the case and found that the frivolous return penalties were justified and the settlement officer did not abuse her discretion. The IRC 6702 penalties are $5,000 for each of the three tax years at issue. The IRS’s motion for summary judgment was granted because there was no genuine dispute of material fact.
In addition, the Court advised the petitioner of IRC section 6673(a)(1), which authorizes the Tax Court to impose a penalty up to $25,000 when it appears proceedings have been instituted or maintained primarily for delay or that a position is frivolous or groundless. The IRS did not seek such a penalty and the Court decided not to impose it sua sponte. However, the Court warns Mr. Heist that they may not be so forgiving if he returns in the future to advance frivolous and groundless arguments.
Takeaway: Mr. Heist originally had a tax liability over $20,000. For some reason, he got it in his head to amend those returns and change the Forms 1099-MISC as if everything filed with the IRS for 2013 to 2015 related to his business did not exist. This bright idea didn’t quite double his IRS debt, but brought $15,000 more in IRS penalties and a stern warning from the Tax Court about further penalty if he returned there again with frivolous arguments. Let this serve as an example of actions to avoid with the IRS and the Tax Court.
The week of November 26 to 30, 2018 had seven designated orders. The week was a mixed bag. Some orders focused on less common issues like charitable contributions of easements, while other orders looked at routine deficiency or Collection Due Process issues.
Docket No. 29176-14, George A. Valanos & Frederica A. Valanos v. C.I.R., available here.
To begin with, this designated order is 30 pages. Most designated orders do not reach a page count in the double digits so it is a rarity to find one this long. As a result, there are multiple items to discuss that I will be summarizing.
The petitioners asked the Court to determine whether the IRS improperly denied their non-cash charitable contribution deduction for a conservation easement in tax years 2005 to 2007. The IRS filed a motion for partial summary judgment that the Court denies. The sole issue stated for decision is whether the petitioners’ conservation easement deed of gift satisfied the perpetuity requirements of IRC section 170(h)(5) and 26 C.F.R. sections 1.170A-14(g)(2) and (6). Because of the genuine dispute as to material facts, Rule 121(b), and a lack of clarity and specificity in the parties’ contentions of law, the Court denied the IRS motion for partial summary judgment.
For background, the order discusses the subject property, the mortgages affecting the subject property and the conservation easement, the subordination agreements, the conservation easement, the petitioners’ tax returns and charitable deduction disallowance, and the Tax Court proceedings.
Of note is that the recalculations of petitioners’ tax liabilities resulted in deficiencies of $192,486 for 2005, $153,742 for 2006, and $104,662 for 2007. The IRS also determined that the petitioners were liable for gross valuation misstatement penalties under section 6662(h) or, in the alternative, section 6662(a). On September 3, 2014, the IRS issued a notice of deficiency, and the petitioners timely mailed their petition to Tax Court.
The Commissioner moved for partial summary judgment on the grounds that the Greater Atlantic Bank subordination was defective and therefore the conservation easement did not meet the requirements for the charitable contribution deduction. The IRS appeared to initially concede any issue with the Wells Fargo deed of trust.
After the parties fully responded to the motion for partial summary judgment, the Court issued its opinion in Palmolive Bldg. Investors, LLC v. Commissioner, 149 T.C. ___ (Oct. 10, 2017), (discussed below). The Court issued an order that invited the parties to file supplemental memoranda addressing the implications for this case.
The petitioners responded with arguments that the conservation easement and subordination agreements are valid, all section 170 requirements are satisfied, and they are entitled to all the deductions taken on their original returns.
In the discussion, the order begins with general principles and reviews the principles of summary judgment, conservation easements under section 170(h), the perpetuity requirement of 26 C.F.R. section 1.170A-14(g) (broken down into mortgage subordination and extinguishment proceedings), the relation of federal taxation and state law property rights, real property ownership and mortgage theory (looking at sections on real property ownership, legal interests and equitable interests, and mortgage theory), and District of Columbia’s real property law (with this section looking at mortgages in the District of Columbia, deeds in the District of Columbia, and conveyances of personal property in the District of Columbia).
Next in the discussion is the parties’ contentions, broken down between the Greater Atlantic Bank deeds of trust and their subordination agreement, and the Wells Fargo deed of trust and its subordination agreement.
Third in the discussion is the analysis portion. The first part of the analysis begins by stating that factual disputes are not resolved under Rule 121.
Next is that Section 1.170A-14(g)(2) requires subordination of mortgages. This second part includes sections on the need for attention to local law, Greater Atlantic Bank’s subordination agreement and the Wells Fargo subordination. The Greater Atlantic Bank subordination agreement section looks at the sufficiency of one general subordination agreement for two deeds of trust, the undated subordination agreement, and compliance with District of Columbia law’s recording and other requirements (broken down further into application of state-equivalent real estate law and recording requirements – validity as to third parties). The Wells Fargo subordination looks at the failure to use the verb “subordinate” and subordination or conveyance of an executory interest.
The third part of the analysis looks at the Section 1.170A-14(g)(b) requirement that the donee receive a proportionate share of extinguishment proceeds. This is broken down further to look at Greater Atlantic Bank’s subordination as to proceeds and Wells Fargo’s subordination as to proceeds.
The fourth part of the analysis turns to mortgage theory in light of conservation easements.
The order then turns to unanswered questions. The Court provides a list of nineteen unanswered questions, stating that thorough answers to these questions would allow the Court to analyze the parties’ respective arguments and reach a conclusion of the issues discussed within the order.
In the conclusion, the Court states disputes of fact exist and that the statements from both parties need further explanation and citations to legal authority.
Judge Gustafson orders that the IRS motion for partial summary judgment is denied. The facts assumed in the order are not findings for trial, and each party must be prepared to prove the relevant facts. No later than December 21, 2018, the parties must file a joint status report (or separate reports if that is not expedient) with their recommendations as to further proceedings in this case.
Takeaway: If you want to experience the complexity of the discussion, issues and questions in this case, I recommend you click the link above. This order dives deeply into an examination of the interaction between various areas of law, such as property (subordination agreements, mortgages, and conservation easements) and tax (charitable contribution deductions) while balancing the intersection of federal law and District of Columbia law.
Docket No. 23444-14, Palmolive Building Investors, LLC, DK Palmolive Building Investors Participants, LLC, Tax Matters Partner v. C.I.R.
The Tax Court issued an opinion in this case, 149 T.C. No. 18 (Oct. 10, 2017), holding that Palmolive is not entitled to a charitable contribution deduction for the contribution of a façade easement because of their failure to comply with certain requirements of IRC section 170. It is still at issue regarding Palmolive’s liability for IRS penalties asserted, which is set for trial commencing January 22, 2019, in Chicago, Illinois.
Order 1 available here. The IRS filed a motion for leave to file a second amendment to their answer, where they would supplement the answer with an allegation that Palmolive’s appraiser was a “promoter” and therefore not a qualified appraiser. The Court grants the motion for leave to amend, but the IRS needs to transmit a detailed written statement of the facts on which it will rely at trial to support its contention he was a “promoter.” Palmolive’s assertions in their opposition are deemed to be requests for admission for the IRS to respond to under Rule 90.
Order 2 available here. Palmolive filed a motion for summary judgment and the IRS filed their own motion for partial summary judgment in response. In a conference call with the parties, Judge Gustafson explained his expectations as to how he is likely to rule on the issues raised in the motions. He suggested that Palmolive “might wish to forego further filings on the motions and instead use its time to prepare for trial.” Palmolive’s counsel stated there would be no further filing on the issues 2 to 4, but would file a reply as to issue 1. The judge stated he expects to grant the IRS motion on issue 4, regarding the IRS written supervisory approval of the initial determination of penalties in compliance with IRC section 6751(b), but that the order or opinion might not be issued until soon before trial. The parties are to prepare for trial on the assumption that issue 4 will not be a subject of trial. Note: there was a subsequent designated order on issue 1 that will potentially be addressed in another blog post that is available here. Spoiler alert: Palmolive loses on issue 1.
Takeaway: This is a case with multiple filings and has complexity. One takeaway from these orders is that when the judge tells you not to do something it is in your best interest to comply.
Docket No. 14214-18, Pierre L. Broquedis v. C.I.R. (Order here).
It is not often that we see a Motion to Strike in a Tax Court case. Here, Petitioner states paragraphs and exhibits in Respondent’s answer are false or not concise statements of the facts upon which Respondent relies.
The Court cites Tax Court Rule 52, where the Court may order stricken from any pleading any redundant, immaterial, impertinent, frivolous, or scandalous matter. The Court states that motions to strike are not favored by federal courts. Matters will not be stricken from a pleading unless it is clear that it can have no possible bearing on the subject matter of the litigation. Additionally, a motion to strike will not be granted unless there is a showing of prejudice to the moving party.
The Court concludes the allegations and exhibits bear a relationship to the issues in the case. Also, petitioner failed to show that he would be materially prejudiced by a denial of his motion to strike. The Court then ordered to deny the motion to strike.
Takeaway: Since the Court states that motions to strike are not favored by federal courts, they should be avoided. While Rule 52 spells out the Court’s ability to order material stricken, this case illustrates that there are rare circumstances when the Court will grant such an order.
Docket No. 7737-18, Kelle C. Hickam & Nancy Hickam v. C.I.R. (Order here). Petitioners filed their petition with 6 numbered statements in their paragraph 5. Respondent filed an answer, admitting to certain paragraphs in the petition. Petitioners, thinking that the IRS partially conceded the case, submitted a motion for partial summary judgment. The Court states: “Petitioners, however, appear to believe that respondent’s numbered paragraphs in his answer refer to their numbered responses in the petition’s paragraph 5. They do not. Respondent’s paragraphs in his answer refer to the numbered paragraphs on the petition.” Since there are genuine disputes of material fact, the Court denied the motion.
Takeaway: While I understand that court documents are not always easy to understand, it would have been wise for these unrepresented petitioners to talk about the pleadings with someone who is familiar with court procedure. It should be a simple step to match the paragraphs between the Petitioner’s petition and the Respondent’s answer. The IRS is not going to concede material issues when they file an Answer. You’re not going to get that lucky.
Supervisor Conspiracy – Docket No. 15255-16SL, Robert L. Robinson v. C.I.R. (Order and Decision here). The petitioner mentions that his supervisor obstructed/impeded his payments and that there was a conspiracy. Otherwise, this looks to be a routine Collection Due Process case, granting the IRS motion for summary judgment because they followed routine procedures.
Materials Destroyed – Docket No. 20942-16, Donald L. Bren v. C.I.R. (Order here). Petitioner filed a motion in limine to exclude from evidence the report of respondent’s expert, Robert Shea Purdue, because he deliberately discarded documents and deleted electronic records investigated but disregarded in reaching the conclusions set forth in his report. The Court granted that motion.

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