Source: https://procedurallytaxing.com/happy-holidays-thanks-to-graev-iii/
Timestamp: 2019-04-18 23:05:12+00:00

Document:
As discussed in our previous post, the Tax Court in Graev III has reversed the position it adopted in November, 2016 and agreed with the Second Circuit’s decision in Chai v. Commissioner, 851 F.3d 190 (2nd Cir. 2017). That reversal had immediate consequences for four cases that Judge Holmes was holding in his inventory. On December 20, 2017, the same day the Court issued Chai, Judge Holmes issued designated orders in four cases in his inventory that had pending issues regarding penalties. In each of the four cases, he turned back an IRS request to reopen the record to allow it to put in evidence of compliance with IRC 6751(b). This amounted to a loss by the IRS on its attempt to impose a penalty on each of the taxpayers in question. These cases will go to circuits other than the Second Circuit giving the IRS the opportunity to try to overturn Chai and create a conflict among the circuits.
The four case are Estate of Michael Jackson (a relatively well known singer); Warren Sapp (a NFL Hall of Famer) and his ex-wife Jamiko together with consolidate case petitioners, Kumar Rajagopalan & Susamma Kumar, et al ; Kevin Sells and Oakbrook Land Holdings. The cases present similar but not completely identical fact patterns. The cases have quite old docket numbers and the parties had already had extensive opportunity to present matters to the Court.
Judge Holmes was not the only judge holding cases; he was just the quickest to release the cases he held due to the pending decision in Graev III. On December 21, Judge Buch issued four designated orders and Judge Paris issued a non-designated order. There could be more to come as it is clear the IRS has been moving to reopen the record to put in information required by IRC 6751(b) and judges have held up cases waiting for the publication of Graev III. Other judges may have similar motions in their inventory of undecided cases and the orders from these three judges may just signal more orders to come perhaps as holiday season ends.
In July of 2017 the IRS saw problems with 6751(b) coming on the horizon. It had filed the motion for reconsideration in Graev that led to Graev III. It filed a motion in the Jackson Estate case, appealable to the 9th Circuit, seeking to reopen the record so that it could place into the record the evidence of compliance with the penalty approval process required by 6751(b). It had not attempted to do so during the trial. That motion sat because, no doubt, Judge Holmes knew that the Court was in the process of reconsidering Graev, and he did not want to rule until he knew where the Tax Court was headed.
Judge Holmes denied the motion filed by the IRS to reopen the record and allow it to place into evidence information regarding the approval of the penalty it asserted against the estate for either the gross valuation misstatement or accuracy related penalty – a 40 or 20% add on to any deficiency the Court might determine. A nice holiday gift for the estate.
The Jackson Estate made clear after the Graev case brought to light a new way to challenge the assertion of penalties that it intended to put 6751(b) at issue but the IRS waited before filing its motion until after the trial and during the trial it did not put on the evidence of compliance with the statute. The trial itself occurred before the Second Circuit’s decision in Chai. The IRS position in Chai was that it did not have to present this type of evidence. Now, at least at the Tax Court level, it pays a price for not hedging its bets.
The outcomes in the other three designated orders issued by Judge Holmes follow a similar path. Those three cases all were tried in Birmingham Alabama and have an appellate path that leads to the 11th Circuit. The parties in those cases claimed conservation easements, the same claim made by the Graevs. Judge Holmes recounts the facts in each of the cases and the knowledge and opportunity for the IRS to put into the record the evidence of compliance during the trial concluding again by denying the request of the IRS to reopen the record after trial to put into the record the evidence of compliance with IRC 6751.
The question before us is how Graev III might affect this case. In this regard, a timeline may be helpful.
-Graev v. Commissioner, 149 T.C. No. 23 (December 20, 2017)….
ORDERED that respondent shall file a response to this Order by January 5, 2018 addressing the effect of section 6751(b) on this case and directing the Court to any evidence of section 6751(b) supervisory approval that is in the record of this case.
ORDERED that petitioners may file a response to this Order by January 12, 2018 addressing the effect of section 6751(b) on this case.
ORDERED that, on or before January 12, 2018, petitioners shall file a Sur- Reply to respondent’s Reply to Response to Motion to Reopen the Record.
The Court and the parties will be busy dealing with the aftermath of the most recent decision in Graev and this may keep the Tax Court and the circuit courts busy for some years to come. Interesting how a little noticed, poorly drafted provision can create so much havoc almost two decades after enactment. Les wonders whether dealing with the poor draftsmanship in 6751 may give the Tax Court practice in addressing issues raised by the hastily drafted legislation that passed earlier this week.
Will some judges still say that since lack of 6751(b) compliance was not mentioned by the taxpayer (and it never will be by a pro se taxpayer), the court won’t consider the issue. My hunch is that is no longer good law. But, also remember that there is still on the books Tax Court opinions holding that where the taxpayer fails to state a claim with respect to a penalty or addition to tax in the pleadings, the Commissioner incurs no obligation to produce evidence in support of the individual’s liability pursuant to section 7491(c), see Funk v. Commissioner, 123 T.C. 213, 216-218 (2004); Swain v. Commissioner, 118 T.C. 358, 364-365 (2002).
Carl points out other issues in a comment he made to the prior post on Graev III for those seeking additional insight. In the season of giving, Graev III will be giving us additional opinions, and possibly nightmares, for the foreseeable future.
Today (Dec. 22), Judges Halpern and Ashford issued a similar order to those issued yesterday by Judges Buch and Paris. The Judge Halpern order (which is actually dated Dec. 21 and is a designated order) is in Pourmirzaie v. Commissioner, Docket No. 25558-14. The Pourmirzaie case was tried on April 25, 2016, but has not yet been decided. The Judge Ashford order (which is dated today and is, by contrast, not a designated order) is in Gonzalez v. Commissioner, Docket No. 27298-14. The Gonzalez case was tried on May 16, 2016, but has not yet been decided.
to the motion.” Rule 50(a), Tax Court Rules of Practice & Procedure.
This case was tried in San Francisco, California, on September 26, 2017, and remains under consideration by the Court. On December 20, 2017, the Court issued its opinion in Graev v. Commissioner, 149 T.C. __ (Dec. 20, 2017), and issues addressed in that opinion may affect the resolution of the accuracy-related penalty determined by respondent in this case under IRC section 6662(a).
Under the circumstances, the Court will reopen the record in this case and set the case for a further trial. In lieu of a further trial, the parties may submit to the Court a comprehensive stipulation of facts related to the section 6662(a) penalty or a stipulation that sets forth the parties’ basis for settlement of that issue.
ORDERED that this case is set for further trial at a time and date certain of 11:00 a.m. on Tuesday, January 30, 2018, at the Federal Building and U.S. Courthouse, Room 2-1408, 450 Golden Gate Avenue, San Francisco, California 94102.
Any motion addressing the application of section 6751(b) on this case shall be filed by February 2, 2018.
Meanwhile, Judge Ashford is churning out orders today with response dates of January 9 for IRS, and January 16 for petitioners. At least one of them (Totten, Docket No. 10691-14S) is a Small Tax Case with a pro se petitioner. The trial of that case was in May 2016.
Today, Dec. 28, two more nondesignated orders that were patterned on the other 6751(b) orders were issued in two different cases involving, in all, 12 dockets. Both cases were tried and awaiting decision. One order was in Rogers, et al., Docket Nos. 30586-09, et al. (5 consolidated dockets). The other was in Full-Circle Staffing LLC, et al., Docket Nos. 12883-15, et al. (7 consolidated dockets).
Yesterday, a similar nondesignated order was issued in Rademacher, Docket No. 30820-15.
“On December 22, 2017, the Court issued an Order directing, inter alia, respondent to file a response, on or before January 5, 2018, addressing the effect of section 6751(b) on this case and directing the Court to any evidence of section 6751(b) supervisory approval that is in the record ofthis case.
So Judge Ashford extended the date for the IRS response to January 19. Petitioner has until January 26 to respond, and any motion must be filed by February 2.
The parties may wish to brief the issue ofwhether the Court’s ruling in Graev III that § 6751(b) compliance is part ofthe Commissioner’s burden of production extends to cases where the petitioner is a taxpayer but is NOT an individual. They should note that the Court traditionally applies § 7491(c) in estate tax cases, see, e.g., Estate of Richmond v. Commissioner, 107 T.C.M. 1135, 1145-46 (2014) (Commissioner bears burden of production on § 6662 penalty); Estate of Giovacchini v. Commissioner, 105 T.C.M. 1179, 1186 (2013) (Commissioner has burden of production on penalties), though we’ve never said why, see, e.g., Estate of Rector v. Commissioner, 94 T.C.M. 567, 574 n.11 (2007) (not deciding if §7491(c) applies to estate because record sufficient to meet any burden of production); Estate of Hartsell v. Commissioner, 88 T.C.M. 267, 269 n.6 (2004) (only assuming § 7491(c) applies because Commissioner met any burden of production).
ORDERED that in their briefs due later this year, the parties state whether they wish to address this issue and, if they do, what their positions are .

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